Liquidnet: Traders moving towards alpha capture


By Vineet Naik.

New research indicates that the role of the trader is shifting towards enhancing fund performance by not only the protection, but also the generation of alpha. This could be through greater sourcing of liquidity, input into the timing of the trades or even suggesting alternative instruments. The research, conducted by Liquidnet, found that 50% of buy-side respondents saw that shift, with 36% seeing the trader’s skillset evolving to assist more in the investment process, so that they may become an alpha generation centre in their own right.

The report is based on interviews with 37 firms managing a total of US$13.9 trillion, conducted between December 2018 and January 2019. 44% of the buy-side respondents were headquartered in the UK, 38% in the EU, 13% in North America and 5% in APAC. Interviews were conducted primarily with global heads of dealing, supplemented with interviews with portfolio managers, to establish a broad view of execution in the investment process post MiFID II.

Respondents identified several fundamental shifts in market ecostructure, including the move towards electronic trading and data driven decision making. The current shift to electronic trading is mostly focused on automating smaller-sized tickets and liquid instruments. Amongst participants, 80% of government bonds are traded electronically, while 65% of high yield bonds remain traded via voice or electronically processed. Increasing reliance on data to improve the execution process by enhancing pre-trade price discovery is a challenge for 45% of respondents given the quality and availability of data today, potentially giving those who trade frequently an advantage. For 20% of respondents, the introduction of anonymous dark pools was a key development in the last year, highlighting further change in the ecosystem.

With the changing market ecostructure comes the need for a robust best execution process to provide consistent client outcomes. For 75% of respondents, collection of accurate data is the biggest priority to validate successful implementation of their best execution policy, and 25% of respondents are increasing governance processes. As the traditional relationship between buy and sell-side continues to evolve, new trading protocols are being added alongside the arrival of new market counterparts, with 36% seeing a rise in interaction with interdealer brokers (IDBs).

Other areas of focus include software systems, with 37% of firms investing in their order management systems (OMS)  to improve the holistic extraction of information around the execution process, and the increasing centrality of data. 46% of respondents anticipate datasets becoming more reliable in one year’s time, however the limited increase in accurate data available currently combined with the need for it has resulted in firms improving their ability to derive value from the data that is available. This has resulted in greater investment in both personnel and technology, with 39% now hiring quants on the trading desk.

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