"With many banks reporting substantial subprime losses, and the US arguably on the brink of a recession, banks need to retain their current sources of revenue, as well as gain new ones. Now is not the time to take your eye off the ball. As liquidity marches away from traditional venues and towards ECNs, MTFs and dark pools, the traditional execution approach will become less profitable, with those that embrace the changes able to steal market share."
According to Quod Financial's recent white paper, 'Advanced Smart Order routing and liquidity management', two key factors are converging to generate this new trading landscape, both of which need to be adequately addressed irrespective of the economic environment:
1. The changing nature of liquidity
Regulations such as MiFID are driving the move towards liquidity fragmentation and are enforcing the need for firms to demonstrate their 'best execution'. Technology on the other hand is the enabler of this change, with ever-increasing computing power and networking bandwidth providing the means to not only meet these changes, but to prosper from them.
2. Investor's changing attitudes to execution The change of investor attitudes is characterized by the 'changing of the guard', as hedge funds emerge as a new class of investors. Not only have they been able to capture nearly three trillion dollars of assets under management globally, but their investment strategies have impacted the classical long-only asset managers too.
"As the markets continue to remain volatile, the likely consideration of reducing IT expenditure and ignoring these important developments is strong. Liquidity fragmentation will not go away if you concentrate on other things. It is an inevitable evolution of the markets, and a major challenge that all industry players must meet head on," concludes Pichvai.