A trio of traders at BNY Mellon has called on their bosses, the portfolio managers, and their customers, the investors, to rethink the way they invest and manage orders.
Regulatory and technological changes in stock and bond markets have made it harder for traders to source liquidity so the portfolio managers and their investors must change how they approach the markets, according to a white paper prepared by David Brooks, managing director of global equity trading at The Boston Company Asset Management, Amy Koch, a managing director of fixed income trading at Standish Mellon Asset Management Company and Lynn Challenger, a managing director of trading at Mellon Capital. Management.
In the equity market, the emergence of high-frequency traders is affecting how orders get handled. “While they deliver fast execution and tight spreads for small orders, they supply less stability and less reliability for highly demanding orders,” said Brooks. “They are also less reliable and stable for all orders during periods of market stress.”
Affecting stock market are the unintended consequences of certain key regulations of the past 15 years, according to the report, “The New Liquidity: Investment Implications of Structural Market Changes.” Decimalization and Regulation ATS, which set up rules for establishing alternative trading systems, caused the markets to fragment. Plus, they ushered in the new breed of market maker known as the high-frequency trader. That combination led to a dearth of quoted liquidity.
The upshot is that the buyside must now chop its orders into small pieces and employ other tactics to avoid moving the market. “The biggest stress, affecting both the equity and fixed income markets, is liquidity,” according to the report.
The report’s authors ask portfolio managers in equities to “adjust downward” their assumptions about how much volume can be done in a single day without moving the market.
They advise investors to “rethink their investment strategies on a number of levels and recalibrate their risk and return expectations.”
