[ C O V E R
S T O R Y
|
“The key to solving
the liquidity puzzle is
to embrace all useful
trading venues and
protocols through
a smart liquidity
seeking algorithm.”
30 // TheTrade // Spring 2018
M I L E S
K U M A R E S A N ]
to make all-to-all trading possible.
Rather than solving the puzzle,
the proliferation of venues has had
a very different consequence—
namely of greater liquidity frag-
mentation, says Kumaresan.
As yet there remains no single
universal trading protocol that
suits all the different types of fixed
income order sizes and names.
Each venue is currently attempting
to solve the order matching prob-
lem differently with an emphasis
on different segments of the liquid-
ity and size spectrum.
“While the classical RFQ (re-
quest-for-quote) trading protocol,
used by MarketAxess, is good for
somewhat smaller orders and for
the more liquid end of the universe
it is not suitable for very large
orders or illiquid names, because
the information leakage is too high
with this approach,” says Kumare-
san.
“The Liquidnet and Trumid pro-
tocols, on the other hand, leak less
information but finding a match
manually is more difficult. If a pro-
tocol is stealthy, then by definition,
the low information leakage will
also reduce the chances of spotting
that liquidity. The key to solving
the liquidity puzzle is to embrace
all useful trading venues and
protocols through a smart liquidity
seeking algorithm.”
There is, of course, the argument
that buy-side trades are too cor-
related to enable the all-to-all mar-
ket to work, because how do you
find a seller when everyone else
wants to buy too? But Kumaresan
disputes the correlation argument.
“While there is a fair level of
correlation, the mere fact that sell-
side market makers typically turn
over most of their books within five
days implies that there is sufficient
interest on the opposite side of a
trade within this small time win-
dow,” he says. “Given that the buy-
side has 95% plus of the liquidity,
we are most likely the ones on the
opposite side too, helping turn over
sell-side books. This would imply
that we are not as correlated as we
may think.”
Clearly there is still much work
to do in order to meet the demand
for a new class of technology that
can aggregate the vast quantities
of data in the fixed income market,
while also enhancing workflows
in a seamless manner and intro-
ducing a smart liquidity-seeking
algorithm.
While that is no small task to
take on, the pace of technology
innovation has undoubtedly spiked
in recent years, meaning traders
can often be spoilt for choice when
it comes to selecting systems –
albeit with the caveat that while
good systems, they do not provide a
seamless workflow. As Kumaresan
puts it: “Empowering traders with
technology tools is how one gets an
edge. It’s like hunting; even if you
are a great hunter you still need the
tools to get the job done.”