Independent market makers step into the liquidity breach

Independent market makers stepped up to help asset managers when some of the traditional providers of risk capital partially withdrew from certain market segments in Europe in the early stages of the pandemic, according to a new report Liquidity in the Time of Covid by Redlap Consulting.

Fast forward today and the report notes that there are now, clear signs that this shift is becoming permanent as asset managers better appreciate what market making firms’ offer as liquidity partners, including greater transparency and continuous presence in the markets.

The research was commissioned by FIA European Principal Traders Association , which represents Europe’s leading market making firms, to drive greater understanding of what independent market making firms do, and their contribution to both financial markets and the wider economy

It was based on detailed interviews with 30 EU and UK-based global heads of trading at asset management firms holding $35.6 trn collectively.

The report said, “Dealing desks at asset managers in Europe are fast becoming more autonomous, reducing their dependency on traditional means of accessing risk capital and increasing their connection to multiple streams of liquidity.2

It added that 2while broker relationships remain pivotal to accessing primary issuances, a wider group of liquidity providers is gaining traction in the European execution space.”

Overall, 91% of respondents noted improved access to automated and diverse sources of liquidity during the March-April 2020 volatility period compared to the crisis of 2008.

In addition, 77% increased their means of accessing liquidity electronically and automated trading during the pandemic while 53% took the opportunity to diversify their means of who they trade with to access to liquidity.

This enabled investors to trade instantly and with certainty, allowing them to adjust their investment strategies and manage their risk.

Rebecca Healey, founder of Redlap Consulting and co-author of the report, says, “Covid-19 continues to redefine the trading landscape as the pandemic lifted the veil on the role market-makers can play in liquidity formation.

She adds, “Liquidity challenges in bond markets early in the pandemic created a vacuum forcing the buyside, to find new trading partners and access points to liquidity – and market making firms stepped up to fill the void.

Now as asset managers continue to partner more directly with these firms, they have been able to benefit from a wider, more diverse pool of counterparties in how and where they can execute investment strategies; while liquidity providers have the opportunity to re-position themselves and build new partnerships.”

Piebe Teeboom, Secretary General of the FIA European Principal Traders Association, says. “The clear message from this report is that asset managers have developed a far more detailed and positive understanding of market makers and the liquidity provision they offer.”

He notes, “The pandemic and, in particular, the lockdowns accelerated a longer-term shift towards screen-based trading as people were forced to find new ways of working.

That reappraisal and recognition – similar to a light-bulb moment – has now cemented the role of market making firms as mainstream actors in the capital markets ecosystem.”

©Markets Media Europe 2021

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