Optimal liquidity sourcing in European equities

Published on 18 April 2023

Liquidity in equity markets is challenged by both cyclical and structural issues, creating barriers to identifying and sourcing access to the best counterparties. Sell-side firms are finding their ability to commit capital is falling. and the role of the sales trader is evolving, Consequently support for dealers, and their buy-side clients, in bringing two sides of a trade together needs to evolve to match the current market, and resources available.

Chris Jackson of Liquidnet tells us how market infrastructure can actively manufacture liquidity, in order to create a better, more accessible market , for both buy- and sell-side.

Transcript of Interview:

Dan Barnes: Welcome to Trader TV at Trade Tech – your insight into institutional trading. I’m Dan Barnes. Today we’re going to talk about liquidity discovery in the equity space. Joining me to do that is Chris Jackson, global head of equity strategies and equities at Liquidnet.

Chris, welcome to the show.

Chris Jackson: Thanks, Dan. Good to be here.

Dan Barnes: Start with how significant factors such as investment flows from outside of Europe into the region affecting the liquidity picture in Europe today?

Chris Jackson: Liquidity is definitely down 21 to 22. We saw liquidity in the Euro Stoxx 50, down 18%. Liquidity has clearly been challenged and has continued to be into 2023. There’s no question that the inflation environment and the Ukraine war have weighed heavily on sentiment for European stocks and we do see that reflected in the activity of overseas investors.

Dan Barnes: And how about mid and small cap stocks coverage? Is that affecting the liquidity picture?

Chris Jackson: So mid and small cap have, I think, been structurally challenged for a number of years. Electronification plays a part in that. Lack of research coverage around small and mid-cap space contributed to an overall lack of understanding, particularly from foreign investors. But equally, liquidity has always been challenging for these assets. And finding the other side continues to be a very difficult process.

Dan Barnes: How does the evolving role of the sales trader and the need for the sell-side to commit capital to trades work with your need to support the sell-side?

Chris Jackson: So the sales traders traditionally been the gatekeeper to markets historically, knowing where bodies are buried and how to find liquidity. That role is increasingly challenged as markets electronify and liquidity goes through algorithms or through dark pools. Equally, the sales trader was traditionally the gateway to capital commitment. You can’t replace that if you’re looking at a significant position, $10 million +, that needs a human to human conversation and an engagement and trust that only the sales trader can provide. But increasingly, capital commitment is also available through the RFQ process or automated market making on exchange. So lots of other alternatives.

Dan Barnes: How are you evolving your services then to better support the sales traders? And of course also for the buy-side?

Chris Jackson: Finding liquidity in these difficult markets is not just about matching codes to the box, but also about working with your client to find the other side acting as their agent. So we’ve developed a broker led targeted invitation which really rents out our distribution and technology to a broker to help them find the other side in some very difficult names.

And we’re also evolving a number of different products that will help in the liquidity discovery process, bringing buyers and sellers together when perhaps they’re not live orders in the system. A trade that’s worth talking about is one we did a few weeks ago. Direct line, $30 million, three days volume, 1% of the shares outstanding in that company. That transaction took two weeks working with both sides in a strictly controlled environment to bring that liquidity together. And is an example of the type of liquidity discovery process that we’re trying to achieve.

Dan Barnes: So if I were a trader and I were looking to better support my access to liquidity and the pre-trade transparency in the equity market, what would be your advice or first steps perhaps?

Chris Jackson: So as you look at markets today, there are an incredible number of choices as to how you execute. And I think understanding what the tools are not only to access the live liquidity that’s in the market, in dark pools, etc., but also tools and services that are going to help you reach out in those really illiquid situations to perhaps create conversations, conversations that you control, but at the same time seek to draw liquidity into the markets on your behalf. I think that’s core to really unlocking some of the key liquidity challenges that people face today.

Dan Barnes: I’d like to thank Chris for his insights today and of course, you for watching. We hope you enjoy the rest of Trade Tech.

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