[ A D V E R T O R I A L ]
execute different types of orders in
varying market conditions. Broadly
speaking, we can split the market
structure into three components.
The first part is the traditional
voice model whereby you call a
bank, get prices, and trade. Even-
tually most of those trades will be
processed through an electronic
facility following MiFID II, but
they are still effectively bilateral
trades between the asset manager
and a bank.
The second part is the traditional
client-to-dealer protocols, like RFQ.
Even though RFQ doesn’t largely
create new liquidity, it makes the
process more efficient, especially if
you have a large amount of smaller
orders. It doesn’t work for larger
or less liquid orders given the risk
from impact, but nevertheless it has
a very important place in the market
structure.
The third component is the com-
bination of the newer dark, all-to-
all, and buy-side-to-buy-side proto-
cols. This is where we believe most
of the new liquidity will be formed.
The power of these new protocols
is derived by their ability to elimi-
nate barriers to trading and reduce
liquidity fragmentation by bringing
together buyers and sellers in an
efficient manner. Historically it has
been difficult, and often impossi-
ble, for these buyers and sellers to
find each other seamlessly due to
inherent market fragmentation and
absence of technology to proactive-
ly seek and create liquidity.
Ten years ago we had a single
dimensional but heavily fragment-
ed market structure with over 40
different banks and brokers each
running their own venue. Today,
the marketplace is more diverse,
more resilient, and less fragment-
ed—partially because electronic
trading venues were able to cen-
tralise institutional liquidity and
empower market participants to
16 // TheTrade // Autumn 2018
better find liquidity, buy-side and
sell-side alike. Liquidnet’s growing
pool of buy-side liquidity is a testa-
ment to that.
The new market structure also
creates greater differentiation
and alpha generation opportuni-
ties as different asset managers
have access to different liquidity.
The combination of new pools of
electronic liquidity, more data,
price aggregators, and better OMS
and EMS capabilities create a lot
more opportunities to find liquidity
where it might not be that obvious.
As a result, theoretically, you could
have two asset managers who have
identical strategies with the same
types of PMs and traders achieve
a very different outcome for an
order, depending on how they go
about sourcing liquidity.
What is also interesting is that
if you compare the fixed income
market to the equities market, in
equities the difference between the
“haves” and “have nots” is legacy,
cost, or very expensive data ana-
lytics. In fixed income, corporate
bonds in particular, it’s more about
behaviour and willingness to adopt
technology. It’s not so much a
question of who spends the most,
but more about who makes the best
use of the available solutions that
ultimately wins.
Where do you see potential areas of
innovation for execution quality for
corporate bonds?
CA: When I started my career 24
years ago, there was no such thing
as innovation in fixed income trad-
ing. You had one option: to pick up
the phone. In the last four years we
have seen more innovation in the
corporate bond market than in the
previous 20 years. At Liquidnet,
we led the way with the creation of
the first institutional dark pool, and
more recently introduced our Vir-
tual High Touch workflow; these
are new ways to find institutional
liquidity. The space is not static,
however, and we are focusing in
further leading the way with more
automation, more targeted proto-
cols, and analytics.
The innovations in the last four
years were about the creation of
new protocols and the proliferation
of all-to-all trading and buy-side-
to-buy-side trading. You can now
target previous opposites to your
order, find substitute liquidity, and
rest larger orders in the dark with-
out the risk of information leakage.
“It’s not so much a
question of who
spends the most, but
more about who makes
the best use of the
available solutions
that ultimately wins.”
You can also use customisable
workflows, such as Liquidnet’s Vir-
tual High Touch, that intelligently
guide orders through different
execution protocols throughout
the day based on the characteris-
tics of the order. This is far from
the limited options from five or 10
years ago.
Looking ahead, the new frontier
in trading will be to better combine
electronic liquidity, data and
analytics, automation, and machine
learning, together with trader
acumen to achieve better results.
This will accelerate the potential
for differentiation, further alpha
generation, and likely create a big-
ger gap between those who adapt
to the new reality and embrace
innovation, and those who don’t.
1
2
As of Q2’18
12-month period Q1’17 – Q1’18