Buyside traders are increasingly engaging with Electronic Liquidity Providers (ELP) that operate under the systematic internalizer (SI) regime, a trend motivated by improvements in both the volume and quality of pricing offered by these providers. This has resulted in a greater degree of interaction between buyside traders and ELP SIs, as they integrate market makers directly into buyside execution management systems (EMS). This adaptation towards bilateral liquidity forms a vital part of the buyside’s overall execution toolkit.
In terms of trading flow, larger institutions have been observed to allocate a more significant portion of their flows to SIs—13%—which marks an increase of 3.1% compared to the previous year. Mid-sized institutions reported a smaller allocation of 11.2%, while small institutions accounted for 12.3%, both seeing a slight decrease. Overall, participation in the SI market was up slightly, reaching 12.3%.
A recent survey indicated that 37% of senior buyside traders expressed a positive experience with both traditional bank SIs and ELP SIs. Notably, 47% of those from smaller institutions reported a favorable experience with both types of providers. However, a significant number of traders, including 40% of smaller funds and 34% overall, preferred to remain agnostic regarding their SI experience, allowing their algorithms or brokers to dictate which SIs to engage with. This illustrates the increasing role of ELP SIs as an alternative source of liquidity, with many brokers offering access to both their internal SI liquidity and ELP flows.
In Europe, a substantial 63% of buyside traders believe that SIs play a critical role in achieving best execution. In comparison, 31% felt SIs were beneficial for liquidity, while 50% stated that SIs significantly help in lowering costs. With the increasing challenges of sourcing liquidity in Europe, many buyside participants are looking for alternatives to traditional exchanges to meet regulatory compliance and satisfy client needs.
The study revealed that only 13% of funds surveyed have never utilized periodic auctions, with larger institutions being less likely to do so at 16%. The overall use of periodic auctions has grown steadily, with 76% of institutions employing this trade category regularly or frequently. Many traders find periodic auctions beneficial, with 61% rating them as good or very good for aiding liquidity, closely followed by 59% who see them as effective for cost reduction.
Among medium-sized asset managers, 43% identified liquidity and market fragmentation as their most pressing challenges, followed by a lack of innovation and excessive regulation. Smaller funds ranked liquidity and the absence of a consolidated tape as their top issues, while larger funds placed them lower on their priority list. The complexities arising from multiple trading venues, various currencies, and inadequate market data feeds exacerbate the challenges faced by institutional equity traders in Europe.
Despite current market conditions, many senior traders from larger and medium-sized firms foresee an increased reliance on Exchange-Traded Funds (ETFs) in their future trading strategies, though demand remains low at present. Interestingly, 71% of senior traders acknowledged accessible liquidity as a significant challenge in the European markets, with larger funds expressing greater concern.
To address market transparency and liquidity access, 37% of respondents suggested the introduction of a consolidated tape or improved trade tagging as viable solutions. Some traders have expressed a preference for reverting to a single trading venue structure, reflecting diverse opinions on how to tackle these challenges.
A notable consensus among traders is that the recent growth of the closing auction has become less of a concern. Many have adapted to this trend, recognizing its importance as a crucial liquidity event. Exchanges like SIX and Euronext are responding to this structural shift by introducing specialized order types aimed at enhancing participation and efficiency during closing auctions.
In summary, as the European trading landscape continues to evolve, the interplay between different liquidity sources, market fragmentation, and the adoption of innovative trading strategies will remain critical topics for institutional traders.
