The dynamics of liquidity, across all asset classes, have shifted immeasurably in recent years, meaning that the old mechanisms no longer work as well as they once did. As a result, market participants continue to spend time and money searching for and finding new ways to capture valuable liquidity in this shifting landscape.
These recent shifts cannot be attributed to any single issue, but rather an amalgamation of multiple drivers.
As fixed income, foreign exchange and commodities markets travel the path towards greater electronic trading and automation – just as the equity market did more than a decade ago – there has been a proliferation of new trading venues, market structures and high-frequency trading activity, resulting not only in the global fragmentation of liquidity but also in average trade size falling. In response to these trends, technology and service providers have emerged to help both identify liquidity and ensure that trades are executed on the most appropriate venues.
Liquidity fragmentation can sometimes be misunderstood. For example, there are over 190 cryptocurrency trading venues globally. But over 80 per cent of trading volume is on just ten of these venues, with the top five accounting for 60 per cent of volumes.
Meanwhile, the advent of onerous trading, reporting and clearing requirements following the financial crisis has made transactions more complex and costly, particularly in Europe and the US where regulation bites hardest. As a result, Asian financial centres have benefited. For example, the combined share of FX intermediation of Singapore, Hong Kong and Tokyo rose from 15 per cent to 21 per cent between 2013 and 2016, according to the Bank for International Settlements.
However, it is important to note that increased regulation has also had the effect of bringing more transparency to where liquidity actually is.
All of these trends require banks, investment firms, trading venues and technology providers to consider how they might best adapt to the changing landscape.
With liquidity shifting into new territories and entities, it is becoming increasingly difficult for market participants to rely entirely on their own infrastructure and connectivity. This doesn’t have to be a competitive area and firms don’t necessarily always need the lowest possible latency, so there is a gradual shift towards managed services to support trading businesses.
Radianz has 160 trading venues on its network that can be accessed with minimum configuration, whereas connecting individually to entities in far-flung emerging markets can take weeks or even months, requiring significant investment. The network adds immeasurable value by giving liquidity providers enhanced distribution while liquidity consumers get much greater choice and enhanced market access.
It’s not only about access to liquidity, however – applications can also be added onto a network to enhance user experience and enable greater efficiencies. By continually incorporating new technologies, market data and regulatory support as well as trading venue access and whatever else clients may need, we ensure the Radianz network remains the most comprehensive ecosystem in the world.
As the sands of liquidity continue to shift in this evolving market environment, it is only with the best infrastructure and network connectivity that participants can continue to access reliable liquidity.
Find out more about our Radianz services.