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.
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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
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