I was the guest of DnB NOR in Oslo earlier this week where I participated in their Nordic Market Structure and Best Execution Summit. The event was well attended and included a number of significant buy-side firms. One of the themes that emerged was that liquidity demand seems to be consolidating into a smaller number of large investment firms whilst, conversely, liquidity supply is fragmenting across different lit and dark venues.
This sets the stage for the “Great Game” between the large investment firms and the HFT community. Every time a buy-side releases an order (however small) into a market, it releases with it an equivalent sized indication of its trading intention. The perception of some in the industry is that the HFT guys will trawl through these orders, and then attempt to profit by stepping ahead of any intentions they can identify. To my mind, both sides have a completely legitimate part to play in the marketplace but you can see how each has a different objective.
This is one reason behind the success of firms like Liquidnet that help buy-sides find natural liquidity between themselves. The only challenge with this approach is that it depends upon finding another institution with an equal and opposite trading intention at the same time. Failing this, then, the ideal market structure for a buy-side institution would be one exchange and one daily auction. Conversely, the HFT community wants liquidity as widely dispersed as possible. Maybe this dichotomy helps explain the “push me/pull you” nature of consolidation/fragmentation that we are seeing across both the lit and dark spectrum of venues.
Anyway, my thanks to everyone at DnB NOR for a very interesting day.
” The only challenge with this approach is that it depends upon finding another institution with an equal and opposite trading intention at the same time”
Not true. Liquidnet allows matches on partial fills.
Thanks for raising this point – LiquidNet occupies a unique position in the market by providing a buy side crossing network that is embedded in the EMS/OMS of many buy side firms. My understanding is that it only matches very large block sizes (just look at its average trade size which is hundreds or thousands of times larger than any downstream dark MTF). Whilst it may well be able to allow matching on partial fills – I believe that the primary use of Liquidnet is for single large block orders. Does anyone else have a view?
We have had more feedback on this post, including some very interesting observation on the state of fragmentation in the Nordic region, which is quoted below:
“Steve, thanks for another interesting view on fragmentation. The Great Game seems to be rolling in Oslo. Yesterday only 6.3% of Telenor (2nd biggest market cap in Norway) was executed at Oslo Børs (lit). Just over 1/3 of the OBX at the same venue, with more than 50% OTC. This market is definitely fragmenting, although the fragmentation between the lit venues is still lagging.”