[ C O V E R S T O R Y | M I L E S K U M A R E S A N ]
“ The buy-side becoming price makers on the names in which we have a natural interest in , through all-to-all trading , is critical to generate and attract liquidity .” rics in order to conduct accurate comparative analysis . This analysis fuels another real-time statistical decision-making engine that assists in deciding who to trade with and what execution method to employ on orders suitable for zero and low touch trading .
Another project underway at the firm is the development of a complex contingent trading framework across asset classes , which calls on portfolio managers to use structured rules to build up high-level trading instructions .
“ It empowers them to specify and obtain more accurate pre-trade cost estimates on complex execution rules . This assists traders with clear trading instructions when working baskets of say multi-day orders contingent on relative price movements ,” says Kumaresan .
So with all this technology , how close is the market to solving the original puzzle of liquidity ?
The liquidity conundrum Equities may have its fair share of challenges in aggregating liquidity across lit and dark venues ; however , liquidity in equity markets is a relatively predictable phenomenon , mostly due to price transparency . Foreign exchange , meanwhile , still has its antiquated mores — in particular the last-look practice that distorts the true liquidity picture .
The real liquidity problem lies in fixed income . Finding liquidity in the fixed income markets , specifically in credit , has become one of the most enduring puzzles across the buy-side . Credit liquidity is fragmented and discontinuous across both price and time partly due to the infrequent trading property of corporate bonds , explains Kumaresan , which is not helped by the fact there are over ten thousand ISINs in Europe and twice that number in the US .
“ Fixed income is still in the dark ages in a technological context ,” says Kumaresan . “ Before the crisis , banks had all the balance sheet needed to price a wider range of bonds in size . Now you have the same trading structure even though the sell-side can no longer carry big inventory .”
The more advanced segments of the sell-side have been trying to make up for the shortcoming of diminished inventory through technological and quantitative innovation — for example , by automatically pricing a large universe of bonds in order to offer tradable streaming prices . Kumaresan believes this is a “ is a big step in the right direction ,” with innovations of this kind becoming critical going forward in retaining the role as providers of easy liquidity .
“ The new reality of the market structure warrants a new trading paradigm ,” says Kumaresan . “ Just because we get the majority of our orders done on the first day does not imply that the market is liquid or that the prices we got were good . It is merely the best price given the circumstances . I believe that , particularly in credit , the buy side becoming price makers on the names in which we have a natural interest in , through all-to-all trading , is critical to generate and attract liquidity . This active way of sourcing liquidity could become a real disruptive event in credit .”
All-to-all can ’ t solve everything The need to find better ways to trade in fixed income has been addressed by platforms such as MarketAxess , Tradeweb , Liquidnet and Trumid , as well as the many other electronic venues attempting
28 // TheTrade // Spring 2018