[ A D V E R T O R I A L ]
Gareth Exton, head of execution consulting, Liquidnet
leads to decisions being made on
who those counterparties are. This
should be completely independent
of any other potentially conflicting
decisions, such as research provid-
er selection.
A framework for evaluation
So how do we begin to evaluate
how a counterparty is handling
one’s client’s orders? Through
experience of analysis carried out
over many years, three key areas
of a counterparty’s systems have
historically provided the answers:
Liquidity, Mechanics and Protec-
tion.
Each of these areas has a direct
effect on the execution perfor-
mance achieved: What liquidity is
your order interacting with? How
is your order being handled and
how are liquidity providers being
interacted with? What protections
are the counterparty using when
executing your order?
Analysing liquidity
Liquidity has become more frag-
mented post-MiFID II with the
introduction of new venue types,
particularly periodic auctions and
systematic internalisers (SIs) that
are now accounting for approxi-
mately 1.5% and 15% of the EMEA
equity market respectively. 2 These
new venues offer significant liquid-
ity, however this is spread across
multiple providers - six in the case
of periodic auctions and over 50
individual SIs. Each provider has a
unique liquidity profile, instrument
universe, average execution size
and toxicity statistics. For that rea-
son, the question is which liquidity
sources should I be interacting
with? Which are providing ‘good’
or ‘bad’ liquidity?
It is incumbent on the execution
counterparty to have a very clear
rationale for all the execution
venues they interact with on your
behalf, and as a result, they should
be able to evidence this rationale
when asked. If an execution pro-
vider is not able to do this, it would
be reasonable to question whether
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