Liquidnet has reported that the recent volatility led to an increase in bond trading volumes on the all-to-all block trading platform.
“In the last six weeks Liquidnet in EMEA and in the US experienced an enormous spike in liquidity and trading volumes,” says Johnny Gray, head of Fixed Income at Liquidnet EMEA.
Defining liquidity as the total cumulative volume of resting orders in its pool, Gray says the firm saw a 57% increase in its weekly average liquidity, while overall weekly volume was up by 129%.
“Whilst in calmer markets, there is timely liquidity from the banks, when markets get stressed banks pull back and people can claim there is no liquidity,” he says. “They may have a blinkered view of what liquidity is. If you assume that it is just immediate liquidity on a screen price, then yes something changed in the last six weeks. But there is an alternative, valuable source of natural liquidity resting in a place that you need to access.”
Traders have reported to The DESK that two challenges to the market were the withdrawal by dealers from market making even in liquid government bonds, which reduced available liquidity and price formation, which was made more difficult as onscreen prices were far from where bonds were actually trading even up to 30 March.
“In the recent volatility the cost of risk capital went through the roof,” says Gray. “Whereas the cost of executing on Liquidnet remained the same. Our average trade size was slightly higher at around $2.5 million, which is still a block for electronic execution in, for example, high yield or EM.”
He acknowledges that Liquidnet saw trades printed several points away from optical prices, “because ours was the only firm price available.”
At present the platform publishes data after a 15-minute delay, which could potentially be used to support price formation, although he notes asset managers need to find a way to access it.
“The data we can share - executions, liquidity opportunities and displayed indications - is always available,” Gray says. “We are relying on an asset manager to have built aggregation tools, or bought an execution management system (EMS), to consume it in an efficient way. Some are better equipped than others.”
©The DESK 2020
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