Equities
a significant portion of their profits
from market data and the provision of
a consolidated tape would in theory
undermine that revenue source and as a
result they are reluctant to see change in
this area.
“The consolidated tape never emerged
because data is so profitable,” said
Pumfrey. “There are vested interests
that need to be overcome. However,
that can only happen when there is a
mandate which forces a change and
so far not enough market participants
have been willing to do that.
Nevertheless, the direction of travel
is clear: a key objective of MiFID II is
increased transparency and therefore
perhaps further down the line change
could be afoot".
The impact of these pressures has been
compounded by the additional effect
of regulatory changes under MiFID II,
specifically the unbundling of payment
for research and execution which has
reduced the amount of research available
in both fixed income and equity markets,
with the small and mid-cap stocks sectors
being particularly hard-hit.
“The balance of power is shifting
between buy side and sell side,” said
Pumfrey. “Regulation is putting more
responsibility on the buy side and
they need to bolster their trading
capabilities to cope with that pressure.
The issue for the sell side is to work
out exactly what its value proposition
is to the buy side. If you run a sell side
business you have to be honest to your
clients and yourself about where you
can genuinely add value.”
According to Pumfrey, this new
environment means that the buy side
also has greater responsibility than
before. Among other things, unbundling
has contributed to a huge increase in
the amount of data the buy side needs
and has to process. The use of client
commissions to pay for research may well
be on its way out. Overall, the buy side
may move towards paying for research
out of its own P&L, but for now many will
rely on RPAs linked to CSAs.
“Unbundling is a sensible process,” he
Currently, a key focus for Liquidnet in
Europe is to continue building the fixed
income member community. The aim is
to get the number of liquidity providers
up from 71 to 100 plus next year in
Europe. As part of that plan, the company
will continue to focus on innovation on
the platform, as well as integration with
OMS vendors to ensure that liquidity
can flow onto the platform in the most
efficient way.
“Volatile markets, and low interest
rates means that market participants
that own bonds become concerned
about access to liquidity when they
have to trade. This issue has been a
concern for some time and it shows
no sign of abating,” said Pumfrey. “As
Liquidnet's fixed income member
community continues to grow, there
will greater diversity which will further
build liquidity. We expect to double
our match rates in six months and
when that happens, we believe that
daily trading volumes will significantly
increase.”
The changing shape of the sell side
One of the significant factors affecting
the buy side globally is the changing
role of the sell side, and in particular the
reduced resources available to brokers.
The reduction in head count in recent
years, including a notable decrease in the
number of sales traders combined with
the reduction in the amount of balance
sheet available for fixed income trading
has had a severe impact on the buy-side's
ability to access liquidity in this market.
December 2016
www.buysideintel.com
13