[ C O V E R S T O R Y | M I L E S K U M A R E S A N ]
“ The buy-side becoming price makers on the names in which we have a natural interest in, through all-to-all trading, is critical to generate and attract liquidity.” rics in order to conduct accurate comparative analysis. This analysis fuels another real-time statistical decision-making engine that assists in deciding who to trade with and what execution method to employ on orders suitable for zero and low touch trading.
Another project underway at the firm is the development of a complex contingent trading framework across asset classes, which calls on portfolio managers to use structured rules to build up high-level trading instructions.
“ It empowers them to specify and obtain more accurate pre-trade cost estimates on complex execution rules. This assists traders with clear trading instructions when working baskets of say multi-day orders contingent on relative price movements,” says Kumaresan.
So with all this technology, how close is the market to solving the original puzzle of liquidity?
The liquidity conundrum Equities may have its fair share of challenges in aggregating liquidity across lit and dark venues; however, liquidity in equity markets is a relatively predictable phenomenon, mostly due to price transparency. Foreign exchange, meanwhile, still has its antiquated mores— in particular the last-look practice that distorts the true liquidity picture.
The real liquidity problem lies in fixed income. Finding liquidity in the fixed income markets, specifically in credit, has become one of the most enduring puzzles across the buy-side. Credit liquidity is fragmented and discontinuous across both price and time partly due to the infrequent trading property of corporate bonds, explains Kumaresan, which is not helped by the fact there are over ten thousand ISINs in Europe and twice that number in the US.
“ Fixed income is still in the dark ages in a technological context,” says Kumaresan.“ Before the crisis, banks had all the balance sheet needed to price a wider range of bonds in size. Now you have the same trading structure even though the sell-side can no longer carry big inventory.”
The more advanced segments of the sell-side have been trying to make up for the shortcoming of diminished inventory through technological and quantitative innovation— for example, by automatically pricing a large universe of bonds in order to offer tradable streaming prices. Kumaresan believes this is a“ is a big step in the right direction,” with innovations of this kind becoming critical going forward in retaining the role as providers of easy liquidity.
“ The new reality of the market structure warrants a new trading paradigm,” says Kumaresan.“ Just because we get the majority of our orders done on the first day does not imply that the market is liquid or that the prices we got were good. It is merely the best price given the circumstances. I believe that, particularly in credit, the buy side becoming price makers on the names in which we have a natural interest in, through all-to-all trading, is critical to generate and attract liquidity. This active way of sourcing liquidity could become a real disruptive event in credit.”
All-to-all can’ t solve everything The need to find better ways to trade in fixed income has been addressed by platforms such as MarketAxess, Tradeweb, Liquidnet and Trumid, as well as the many other electronic venues attempting
28 // TheTrade // Spring 2018