Buy-side Perspectives Issue 10 | Page 29

Executive Summary Decades of regulatory upheaval have created a patchwork of exchanges, multilateral trading facilities (MTFs), over-the-counter (OTC) liquidity providers and dark pools. Advances in technology and the introduction of MiFID II are now redefining roles and expanding the relationships between partici- pants. As a result, smart aggregation and the creation of personalised liquidity pools are creating the opportunity for trading experiences as individual as pages on social media. Welcome to the new world of equities trading, one in which proprietary trading groups will provide prices directly to clients, banks will fine-tune their risk-taking businesses, and mutual self-interest will ensure that technological advances, when correctly applied, result in more profitable outcomes for both traders and investors. The implications of these changes are significant: clients can now benefit from the relative value of their relationships, while being able to aggregate personalised pricing from a range of sources into their own personal limit order books. This is creating a new way of looking at the world, one in which performance can be seen as maximising, and executing on available liquidity. This evolving market structure not only signals superior pricing opportunities but greater access to liquidity as traditional intermediaries and principal trading groups unclutter the marketplace to deliver much improved and more targeted execution. The changes in the trading landscape could be as stark as in 1986, when London’s Big Bang eliminated the role of jobbers and radically redefined the role of stockbrokers. This time, it is the role of trading venues and institutions that will be transformed, as both clients and liquidity providers benefit from the ability to target liquidity and pricing down to the individual strategy level. 2 Autumn 2017 These advances would not be possible without much-improved processing power and Artificial Intelligence, enabling systems to manage the sheer complexity of real-time pricing across hundreds and thousands of broker and client relationships, as well as a growing number of execution venues and variety of trade types. While the sophistication and choice available to participants has increased sharply, so has the capability of analytics to manage this new paradigm. This will create an opportunity for platform-neutral agency brokers such as Instinet to act as curators of market liquidity, whose role is made even more relevant by the MiFID II requirement to ensure ‘sufficient’ rather than ‘reasonable’ steps are taken to provide best execution. For many in the foreign exchange and fixed income markets, whilst less transparent than equities, it may seem somewhat familiar territory, as they have become accustomed to multiple execution protocols and venues, as well as the ability to tier pricing to individual clients based on size, relationship, existing positions and opportunity. But for equity market participants, the prospect of thousands of buyers and sellers developing new and deeper relationships signals the start of an even more open and transparent environment. For market participants that embrace this brighter future, take advantage of technological advances and identify the opportunities that regulation has created, the potential to reshape the way they do business is almost limitless. THE IMPACTS OF A NEW LIQUIDITY PARADIGM www.buysideintel.com 29