February 08, 2013

I've been reading quite a bit lately about how good old-fashioned equities are finding their way back into investors' favour. And this time it is more than just the indices that are on the move, volume traded is going up too. In many ways, volume or consideration is a more useful indicator of the general health of the trading industry and the US has reported record influxes into managed market funds and ETFs recently. A similar trend is being widely reported across Europe too.

So, if this is the start of a real resurgence, who will the winners be? They say a rising tide lifts all boats and so I guess we can expect all market participants to prosper to some degree. But is this “the right sort” of liquidity? Are the original participants returning to the market or is it just more HFT chasing its own tail?

[Hedge Fund Performance Expected To Climb In 2013 ]

The charts below might help answer this. The first looks at total European equities traded by consideration and it certainly seems to show the beginnings of a trend.

Fidessa 1

The second chart is based on data from the Fidessa network. Because it focuses on its core client base of asset managers and sell-side brokers, it effectively strips out HFT and instead represents “traditional” order flow.

Fidessa 2

The same upward trend is clear and so there are definite grounds for cautious optimism. But the real winners will be those that have been using the downturn to rethink their businesses. Firms that have simply reduced capacity may find that they are ill-equipped to take advantage of this new sea of liquidity. More so, as whatever happens to volumes, the game is different now. The proliferation of venues and order types, combined with on-going regulatory churn, demands a different trading workflow. This needs to be based either on scale or specialization and the firms that achieve this will get the lion’s share of the new liquidity.

This blog originally appeared on the Fidessa site.