Beyond Liquidity is a weekly segment, launched in partnership with Liquidnet, that addresses challenges when trading equities, bonds and listed derivatives.

In this first article, Mark Govoni, CEO of Liquidnet explains how normalization of extremes, evolving regulation and new technology have changed how trading desks need to operate.

As we emerge from 2022, global financial institutions are left wondering how this bruising period will shape the future of trading. The past few years were characterized by simultaneous seismic events – a global pandemic, soaring inflation, rising rates and intense bouts of volatility – making once-in-a-generation events a regular occurrence. The normalization of extremes, evolving regulation and new technology has triggered a shift in how desks operate and is rapidly shaping the trader of tomorrow.

Last year in equities, we saw the abrupt end to the ten-year bull run that has defined modern markets. The sugar rush fuelled by the era of cheap money has reshaped the financial ecosystem – ushering the rise of the market makers, enticing the ever-growing contingent of retail traders and driving incredible growth across the sector. Despite turning the page, this era will have lasting implications for the sector and put buy-side traders to the test in a radically different market.

As we start the New Year there are tentative signs of green shoots, as market soothsayers predict that we are approaching peak inflation. Battle-hardened traders, however — stung by the events of the past 12-months — will be looking at how to best prepare for potential storms in an increasingly challenging market.

As institutions plan on how to navigate tough conditions, we can expect several key trends taking shape in how desks trade and how businesses structure themselves to prepare for the future.

A new liquidity landscape

Traders are contending with not only heightened risk but also difficult markets that are behaving like never before. As a result of eye-popping spikes in volatility, we have seen a relative lack of institutional flow during tight periods in the market, making equities trading increasingly tough. The result was a rebalancing in equities markets, driven by traders looking for reliable and easy liquidity; a change in behaviour that boosted ETF markets, which now account for as much as 40% of total US equities flow at high points. These changes require desks to assess sources of liquidity and ensure they are able to move in and out of positions in times of stress.

The technology arms race

It’s been hard to escape recent leaps forward in technology, sending global headlines into fever pitch. From the advent of ChatGPT to progress in automation and the cloud, we can expect to see financial services firms looking to capitalize on these advances to enhance the role of the trader – whether improving decision making processes or streamlining desks to boost efficiencies. How we interact with technology is changing as exciting new developments permeate through the sector and a tech-native generation takes increasingly influential positions on desks. Intelligent analysis backed by intuitive interfaces will be the bedrock of future systems, as cutting-edge technology sets firms and their strategies apart.

The unstoppable rise of multi-asset trading

Another consequence of the maelstrom that has engulfed markets in recent years is the shift to multi-asset trading. A mixture of fee pressure, rising operational costs and volatility are driving demand for consolidation – forcing traders to do more with less, broadening their skillsets and breaking desks out of traditional silos. As this trend gathers momentum, there will be knock-on impacts on the technology providers and brokers that serve the buy-side. No longer enough to address individual asset classes, technology will have to be able to support desks across markets, while brokers will have to think about how to provide clients quick, simultaneous access to a broad array of asset classes. The shift to multi-asset trading shows no signs of letting up and will likely become increasingly widespread – sending ripples through the financial ecosystem, as traders and service providers adapt to a new reality.    

The evolution of the broker

As changing markets and the move to multi-asset trading forces desks to assess their approach to sourcing liquidity, brokers are adapting to best serve buy-side clients regardless of trading conditions. As a result, the role of brokers is more important than ever. While low touch trades march on in the background, executing complex and lucrative high-touch trades remain challenging.  Sophisticated brokers are therefore becoming an increasingly vital partner to the buy-side – not only in sourcing large blocks of liquidity in times of scarcity but also delivering expert advice on how best to execute such important orders and handling a much broader range of asset classes. Brokers are carving out a nuanced and highly valuable role that’s more consultative and increasingly central to traders looking to deliver effective and differentiated trading strategies.

We are at an inflection point. The culmination of several factors – from the changing make-up of participants to market conditions, technology and changing trading behaviour – has set the scene for an exciting period in financial services. There will of course be tough times, as markets remain particularly challenging, but the destination represents a bright future that will transform how we approach markets. The foundations are laid for a more efficient, transparent and technologically advanced trader of tomorrow.