The market is fond of complaining about the lack of liquidity in markets. But panellists at this year’s FILS Europe argued that there is more of it out there than people might think – if you know where to look, and what data to use.
Having a diverse range of liquidity providers is essential – and that diversity needs to go beyond the bank-versus-non-bank dichotomy.
“Non-bank and bank liquidity providers are converging,” explained David Everson, EMEA head of fixed income at Liquidnet. “Banks are putting effort into building their algo businesses and moving to central risk book models, similar to non-banks. At the same time, non-banks are putting effort into growing their buy-side relationships – traditionally a bank move.”
As such, the decision is now less about whether to opt for a bank or non-bank provider, and more about which specific counterparty is best suited for the trade, panellists said, as traders need to consider the position of their institution and the details of their strategies, alongside potential restrictions that their clients could have on counterparty ratings. Some may be unable to trade with counterparties rated below investment grade, for example.
While the general consensus is that access to a wider range of counterparties is better, there is a delicate balance to strike with this approach.
CEO, Quantitative Brokers.
“You don’t want to diversify so much that you’re not building relationships. You want to be a meaningful player to your counterparties so that they’re there in times of stress,” warned David Kalita, Quantitative Brokers CEO. “If firms spread themselves too thin, they risk losing connections with the people behind the liquidity.”
In a later panel, however, Andrew Munro, global head of fixed income trading at Janus Henderson, stated that his firm was mindful of how much it engaged with non-bank liquidity providers.
“We have more confidence that banks will be there in times of stress,” he noted. “In times of volatility, the transitional liquidity providers need to be there to ensure that client needs are met.”
“Ultimately our goal is to stay connected to stories, to data and to people behind liquidity- because in fixed income understanding the context behind every quote can often be more valuable than the quote itself,” added Gozde Yildiz, director and fixed income trader at UBS Asset Management.
Data is a key factor in accessing liquidity, and one that is only increasing both in importance and availability.
“A challenge of recent years for trading venues has been providing access to liquidity, but I think that’s been solved now,” Everson observed.
Munro issued a warning on this perception.
“We are getting very used to what we perceive as increased liquidity – through things like ETFs and portfolio trading. We can move a lot of paper very quickly – until that doesn’t work. Are our desks, the sell-side desks, ready if we need to revert? The bonds that are liquid are liquid, but the bonds that are not liquid, and are not part of ETFs or indices, are becoming hard to trade. That worries me a bit. How do we add alpha? We need to be able to trade in markets in ways that differentiate us from passive funds.”
Everson argued that the answer is data-driven.
“The thing now is liquidity intelligence, providing clients with the ability to score, rank and analyse the liquidity that’s coming in before they embed it into their workflows so they can decide who they want to use as a counterparty, he said. That’s where venues can add value,” he stated.
One way that firms will be gaining access to more data is through the much-debated consolidated tapes in Europe and the UK.
READ MORE: Market awaits CT news amid cross-Channel delays
Tom Harry, head of product at MTS, added that the extent of the impact will vary based on instrument type. “European govies are already very transparent as to where the interdealer market is trading, but that tape will be more impactful in the credit market. It could encourage more trading.”
Alongside the consolidated tapes, both jurisdictions are introducing new transparency regimes. Initial timelines scheduled these to roll out just before the tapes. Delays mean that the regimes will be in place well before the CTs, from December 2025 in the UK and June 2026 in the EU.
Kate Finlayson, global head of FICC market structure and liquidity strategy at JP Morgan, opined, “The sunny side up view is that data helps towards further electronification and further development of trading models – especially with algorithmic trading, where you can assess performance post-trade.
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