LONDON & NEW YORK--(BUSINESS WIRE)--Although change and uncertainty will continue to hold sway across the lit and dark equities venues in Europe for the foreseeable future, according to new research published today by TABB Group, one certainty stands tall – transparent, actionable metrics supporting the quality of liquidity are lacking.
While MiFID II and the implementation of a post-trade consolidated tape are coming, buy-side traders tell TABB they don’t have the time to wait to learn how these changes will impact their markets. In 2012, electronic trading across Europe will rise to 45% of average daily value traded by traditional asset managers, up from 38% in 2010 and up from 25% in 2008.
What the buy-side trader needs, explains Laurie Berke, a TABB principal and author of “European Market Quality: A Metric in Need of a Standard,” is a framework to define and measure the relative quality of liquidity in any given market and determine how that quality metric can drive optimal decision-making.
Over 50% of the buy-side traders interviewed expect MiFID II regulations, when they do arrive, to make it harder for them to source liquidity. Presently, 51% use transaction cost analysis (TCA) to develop a view on dark venues – but they have no means of directly comparing quality of liquidity across lit markets where the majority of price discovery occurs.
The report is based on conversations with European heads of sell-side electronic equity trading desks, exchanges and third-party market-data providers and head traders at major European-based asset management firms. It highlights the challenges in developing a European framework to compare the quality of liquidity across lit markets and the importance of doing so in the interests of standardization and transparency in the industry.
According to Berke, brokers have developed next-generation models and analytics to support electronic order routing to obtain best execution, but each broker’s model is unique, proprietary, and cannot be compared directly to another’s. As a result, buy-side traders have no consistent methodology for evaluating the relative quality of one trading venue versus another in light of the unique characteristics and objectives of any given order. “Exchanges and trading venues have yet to respond to traders’ needs for a set of metrics comparing the character and liquidity quality on one venue against another.”
This will be the year, says Berke, when the battle for order flow will raise the bar for differentiation in market quality, when fiduciaries and their brokers become far more proactive in asking for an increased ROI. “Traders invest with the allocation of their order flow, and it’s time for the marketplace to increase the return on that investment in the form of a framework for analysis and preservation of precious alpha.”
The 24-page report with 12 exhibits is available for download by TABB Research Alliance Equities clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.
About TABB Group
TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets, based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online capital markets community for thought leadership focusing on issues covering current industry-wide topics.