With Bryan Labelle, Director Trading Capabilities, Refinitiv
How would you characterize the state of liquidity sourcing in equity markets?
Equity markets are constantly shifting when it comes to sourcing liquidity. Regulations, dark pools, ETFs, and the shift from active to passive trading, to name a few, are morphing the landscape which an equity trader must navigate. Liquidity-seeking strategies of yesterday are quickly rendered obsolete. Fortunately, we are starting to see innovations in this space which are assisting the buy side to do a better job of liquidity discovery. Actionable, natural, reverse IOIs and uncommitted orders are just a few examples that have been on the rise. Improvements in technology and trends to move and consolidate data have also enhanced blotter scraping / cross networks and Alternative Trading Systems. These systems can offer welcome relief when spreads in the traditional venues start to widen.
How are IOIs evolving as facilitators of block trades?
Historically, traders needed deep understanding of their brokers’ block specializations and had to know how to separate the wheat from the chaff in order to fill large orders. We are starting to see much more integration in scanning for blocks and the decision-making process, before the trader moves on to another source. For example, IOIs are often piped into the OMS/EMS and integrated into the ‘wheels’ that rotate through liquidity sources. A growing trend in the past five years is that sources of liquidity are yielding less, so integrations of myriad systems will be paramount in ensuring traders continue to make progress in their search for IOI liquidity. We still see IOIs as a very manual view into liquidity. Moreover, IOIs still have the negative side effect of information leakage, and they don’t offer a very reliable source of liquidity, especially for the medium to small buy sides who need to compete for broker attention. But we are starting to see a greater integration of natural IOIs into liquidity-seeking systems, which is a positive indication that deeper integration with position and central risk books is starting to connect true liquidity in a visible framework. But as mentioned, liquidity is getting harder to find, and the buy side is no longer able to rely on their brokers as their sole source of blocks. They will need to be much more creative in mining block liquidity from a variety of different sources. Until there is ubiquitous integration across all contributors of liquidity, the process of searching wider arrays for blocks will be time-consuming and expensive.
Is there a standardized definition and/or set of industry best practices for IOIs?
Although there are market conventions, the Association for Financial Markets in Europe (AFME) has developed standardized definitions and a code of conduct surrounding IOIs. This has helped shed some light on the type of IOIs that are being displayed to the end customers. Although these standards are key to developing structure for the block trade business, it hasn’t fully addressed information leakage which can lead to market impact. IOIs are un-committed orders, so at any point regardless of the type of IOI, the IOI provider can pull the order. It’s not clear if there will be any regulation to address this area of IOI trading. One way to tackle the problem is to apply functionality to block trading systems that would track the performance of IOI providers as an additional data point that end clients can use to determine if they should expose their liquidity needs to a particular provider of IOIs. That may help to shape the business to be a more reliable and safer source of liquidity.
What is Refinitiv doing to help the buy side source liquidity via IOIs?
Refinitiv has joined the race and is currently undergoing a project to evaluate how we present IOI liquidity. We are taking a fresh look at the Autex IOI system to address the challenges of traditional block liquidity. We are approaching liquidity with three things in mind: (1) reducing an institution’s market impact; (2) enhancing access to liquidity; and (3) elevating the overall user experience through automation and streamlined workflow for both the buy and sell side. Buy-side institutions should have more security and anonymity until the final stages of bilateral negotiations. Natural liquidity on both ends should be securely integrated and exposed using rules-based automation. Refinitiv is approaching this project knowing that such a platform should be open and future-proof to ensure it can keep up with developments in AI. There is no question that these challenges are no small feat — anything short of a full solution will only partially address a full sized problem. Refinitiv plans to come to the table with a solution that will give traders concrete options to trade before progressing to the lit exchanges. There is no panacea to finding block liquidity; any truly viable way to supercharge access to liquidity will be a multifaceted approach across vendors and institutions.
What is the future of block liquidity sourcing?
The tea leaves indicate that the industry is close to developing more advanced liquidity discovery frameworks. By using robust and secure APIs and cloud-based repositories, we are starting to see a more connected framework that will assist the trader in maximizing access to liquidity. The technology to do this has been around for some time; the resistance seems to be tapping into the sources. We are all too familiar with the age-old problem of integrating software across multiple systems involving multiple parties. The ROI is never readily clear unless there is a substantial and guaranteed community that jumps on the platform. Fortunately, there are some great fintech companies helping in these integration challenges by offering reasonably priced, off-the-peg integrations with multiple systems, robust APIs and interoperability functionality to transfer data between systems and institutions. Smaller buy-sides with less capital and clout face the toughest challenges in sourcing liquidity, and these firms will need to embrace technology that serves up low-cost integration to counterparty systems.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Refinitiv, or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.