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Susquehanna survey finds European asset managers must diversify their liquidity sources to deliver best outcome 

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A new survey of European asset managers, conducted by Acuiti and commissioned by Susquehanna, finds that 71 per cent of those who use independent market makers (IMMs) as direct liquidity partners started to do so in the last three years, coinciding with the rise in market stress.

It is estimated that a third of the top asset managers in Europe currently engage directly with IMMs, suggesting significant room for growth.

Access to specialism was, overwhelmingly, cited as the main driver for diversifying trading counterparties.

Those using IMMs reported lower execution costs and less issues accessing continuous liquidity during periods of intense volatility. 

As rising market stress leads some of the traditional liquidity providers to partially withdraw from certain segments of the market, the need for Europe-based asset managers to expand and diversify their liquidity partners’ pipeline becomes increasingly relevant.  

The report, ‘Turbulent Times: How volatility is changing asset managers’ approach to execution’, surveying major Europe-based asset managers, suggests that having a mix of counterparties with different business models improves pricing in aggregate and access to liquidity during market stress while ultimately ensuring better trading outcomes.

These benefits mean investors can trade instantly and with certainty, enabling them to adjust their investment strategies and manage their risk more efficiently, the authors say.

The findings provide insights into asset managers’ changing perceptions of their trading counterparties, ease of access to liquidity, particularly during stressed market conditions, and what requirements they need to meet to ensure efficient portfolio trading activity.

The study showed that a divergence in approach to trade execution is emerging across Europe with notable implications for asset managers and market efficiency more broadly.

Other key findings from the survey include:

Over a third (35 per cent) of asset managers are now looking to make changes by increasing or diversifying their trading counterparties.

The biggest driver cited by most (73 per cent) of those changing or increasing their liquidity partners was a desire to execute against firms that specialise in a specific product or market.

A minority (8 per cent) of the respondents said they would further reduce the number of liquidity partners, but the majority (57 per cent) said they planned to stick to the status quo, reflecting a clear divergence in approach within the sector.

By type of liquidity provider, independent market-makers were said to perform better on providing liquidity, lowering execution costs, and improving price quality. Such benefits are particularly relevant during periods of market stress like those experienced in the early stages of the pandemic, Russia’s invasion of Ukraine and the recent gilt market disruption.

A significant proportion of respondents saw no difference in the ability for IMMs and banks to execute in size, although traditional banks were said to cover a wider range of asset classes and offering a broader variety of financial instruments.

–          Most of the respondents (90 per cent) considering either increasing or changing their counterparties cited the burden on internal compliance as the biggest barrier to doing so. Misconceptions around regulatory requirements and fear over information leakage were also cited as key obstacles to liquidity providers’ diversification.

William Mitting, founder and managing director at Acuiti says: “Our study shows a clear divergence in the sector with regards to using trading counterparties between those diversifying to respond to a changing environment and those sticking to the status quo. Ultimately, those firms that use IMMs reported better access to liquidity during times of market stress. In addition, many of those using IMMs said that they offered improved pricing and execution costs. These suggest that asset managers are likely to accelerate engagement with IMMs and the diversification of counterparties.”

John Keogh, managing director at Susquehanna International Securities says: “Heightened volatility, the need to reduce costs, the need for liquidity in specialist sectors and constraints on liquidity provision by banks have led the buy side to seek liquidity from other sources, particularly from independent liquidity providers. Although the survey shows that compliance burdens may be an obstacle to adding liquidity providers, this concern may be overstated as the growth in RFQ based platforms that admit as members both buyside and market makers directly has greatly decreased the administrative effort to access liquidity directly from market makers “

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