Liquidity patterns have changed as a result of the ongoing trade war. Immediacy is king as sudden changes to tariffs can wildly skew the value and risk profile of stocks, bonds and currencies.
Long-term investment managers need to find access to liquidity – or even to manufacture liquidity – in order to buy and sell securities while minimising the cost impact of these swings.
Gregg Dalley, global head of trading at Schroders, Chris Jackson, global head of equities at Liquidnet and Sam Henderson, head trader for EMEA equities at Invesco outline how traders can find the other side to trades in a volatile environment.
Transcript:
Dan Barnes: Welcome to Trader TV, your insight into institutional trading. I’m Dan Barnes. Market uncertainty upsets steady liquidity provision. So today we’re discussing how buy-side desks can actively find or even manufacture liquidity. I’m joined by Chris Jackson of Liquidnet, Greg Dalley of Schroders, and Sam Henderson of Invesco. Sam, can I start with you? How would you define market activity at the moment?
Sam Henderson: So I think market activity has been driven by uncertainty and I think that’s best seen in volatility. So if we look at the VIX it’s risen to 60 two weeks ago but it’s still hovering above 30 and this has had an impact across all asset classes. We’ve seen equities fall but dollar is key and I the weakness here is important. Over the last few years we’ve seen US exceptionalism and a lot of money and capital has flowed into US assets. I’m concerned that if capital stops flowing to US assets that we can have continued volatility across asset classes.
Chris Jackson: The US was definitely front and centre of people’s perceptions going into the new year, and then mid-quarter we started to see some asset allocation coming out of US into Europe. And that seemed to be relatively well thought through and a relatively stable trend, but obviously it’s accelerated quite significantly in the last few weeks and with the dislocation we’ve seen a significant increase in that kind of activity.
Gregg Dalley: We entered a year of consensus long US equities. AI was a huge positive. You know, Trump’s coming in. We’re talking about a resolution to conflict across Russia, Ukraine, and Gaza, hopefully within days or weeks. That didn’t quite pan out. The AI enthusiasm seemed to unravel. US started to underperform. And then from there, it sort of trended that way. I mean, CTA funds have gone from max long US equities to now sort of their lowest position in recent years. Hedge funds have de-leveraged. Huge sector skews in terms of performance. Now we’re looking at a situation where recession is sort of 50% priced in over the next six months and it was probably below 10 at the start of the year. So just the speed of change has been drastic.
Dan Barnes: And then what has that speed of change meant for finding tradable, actionable liquidity in the market?
Greg Dalley: It just makes it a lot harder because things are moving a lot faster than normal. So equity liquidity goes through the roof, fixed income liquidity sort of slows down, becomes a bit harder to trade. But actual liquidity is probably similar, volumes are up. We had six consecutive $1 trillion days in the US, $148 billion across Europe, new records being set there, but actual liquidity in the market didn’t feel that different to normal.
Sam Henderson: We’ve seen a trend towards more OTC, more SI, but in the last two weeks, we’ve seen an uptick in lit trading, and I think that’s down to three factors. We’ve see a higher participation of HFT. Fund managers are moving more to a VWAP style strategy over the day, and there may be crowding in some of the trades that people are trying to do, and therefore, you can’t find the other side of the trade, because you’re all doing the same thing.
Chris Jackson: Yes, we’ve certainly seen this increase in lit market activity. The dark pool has been busy. There’s business to be done, but the level of urgency that exists in the market means that institutions aren’t staying in the pool over a prolonged period and only in the pool. They’re getting involved using dark aggregation strategies, channel shifting within our business from a block resting strategy to dark aggregation and lit market algos that are going to combine the full menu of liquidity propositions out there to get their order done. Institutional investors have high conviction about the order, so when they get a match they’re trading. But at the same time, and we see this frequently in periods of volatility, you’re seeing investors dial down when they do get a much wanting to perhaps get an average of multiple blocks done over the day rather than getting done in one hit and having that price volatility
Gregg Dalley: PMs generally want to trade when they send us a ticket, but that clear communication with the PM about what the order’s for, why they’re trying to do it is prevalent. I mean, you look at some of the moves, like Rheinmetall, that opened down 28% and closed flat on the same day. Sometimes trading quickly can be very good or very bad, depending on the outcome.
Sam Henderson: Of our managers buying that stock changes the tools we use. I think we can wait around in block situations for much longer in a low volatile environment. We do have to manufacture liquidity here. And the problem of the buy side is we can’t hedge our trades. And if we’re buying a large block in financials, it’s much easier to trade that on risk. Once you’ve tried to trade natural, because the sector will generally trade together. It’s tricky in lower ADV and mid caps and small caps, but in large caps where sectors are following each other, then risk trading in this environment, I think is really important and having access to that. Now risk trading is via the banks, but it’s also via the ELPs, which are an important tool for everyone on the buy side.
Gregg Dalley: 30 minutes is a long time in this current market. So if you can trade on risk and trade it within 60 seconds at much sort of tighter known cost, that I guess is a much more prevalent sort of trading strategy for the buy side at this moment. And then liquidity provision, I guess the type of providers we’re using. So SIs and bilateral is obviously big. Some of them are not SIs as well, but sort of non-bank SIs liquidity is a big discussion point for industry at the moment.
Chris Jackson: Have you found that’s changed in this environment through that volatility, the willingness and ability to present capital?
Gregg Dalley: No, they’ve been incredibly consistent, so when you think that step away, little to book volumes gone up, we expect that’s ELP, HFT liquidity, so we haven’t seen those types of liquidity providers step away in this environment.
Sam Henderson: Our systematic part of the business, which is low ADV orders, we are seeing a similar fill rate as we did in March. So it shows me that our counterparties are holding up in this environment.
Chris Jackson: Yeah, that fits with our experiences. We distribute much of that risk and we found that their willingness and ability of counterparts to engage with our members has not changed.
Sam Henderson: I think you have stepped up your communication with your portfolio managers and it may be you’d speak to them several times a day, now it’s several times an hour, and we’re trying to provide them with opportunities throughout the day and understanding their portfolio and what their goals are and how we as a trading desk can implement that. But it’s not just our relationship with the portfolio managers, it’s our relationship with our counterparties and knowing what we can get done at the counterparties, what the objectives here and see if we can match that. Now that’s extremely difficult. In a high volatile environment, but we have been working towards having the tools to be able to do that.
Dan Barnes: Chris, when you’re working with clients, are you seeing the way they execute change at the moment and how do you see changes being reflected in the market?
Chris Jackson: You’ve seen market volumes on the face of it double, but at the same time, your ability as an institutional investor, where you’re dealing in real size, to get your order done, is not necessarily immediately possible. So it’s really about being more urgent, going everywhere for your liquidity, using dark aggregation strategies and this kind of thing to access a broader portion of the market. The one thing people don’t have in the volatile market is time to wait. That level of urgency translates to a broader capture of market liquidity. That might be bilateral, that might be lit market, that might dark pools, but it’s really about being able to get it there.
Gregg Dalley: Talking about the lit participation being much greater, I think if you look at anyone smart with a router, that generally sits at the bottom of the SOR. So when there’s more activity, it’s probably the lowest sort of quality execution, smallest field size, largest amount slippage to the market. So bilateral liquidity is with the bank SIs or non-bank SIs, which is more of a topical discussion. That’s very valuable to the buy side.
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