Liquidity & Electronic Trading special report

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Olympic-sized pools

In this Waters special report examining liquidity in the markets, our roundtable feature asked a number of capital markets firms and service providers how they think regulatory changes intended to reshape market structure will in turn affect flows of liquidity. Their answers appear to point the way to one big pool in our future.

Executives from Fidelity and Goldman Sachs, when asked how the Securities and Exchange Commission (SEC)-proposed market structure changes and the European Commission's Markets in Financial Instruments Directive II (MiFID II) will change the flow of liquidity, indicated they believe fragmentation or tiering of markets is not on the horizon.

While more trades have gone to dark markets in the past two years and with the SEC's trade-at regulation on the way, paradoxically these capital markets executives see fragmentation of markets declining. As Mike Cashel of Fidelity Capital Markets says, "While fragmentation [now] may be at a peak, the markets today are more connected and consolidated from an access to liquidity point of view than they ever have been."

Still, even without fragmentation causing disadvantages for some market participants, we wondered if there might also be a divide between large firms that can build their own smart order-routers and smaller firms that use external order-routing providers. Smaller firms can buy into and leverage the tools of larger ones, Adam Mazur, global head of connectivity at Goldman Sachs Electronic Trading, tells us.

With interconnection of once-fragmented markets now well developed, and the interest of large firms in providing their advantages -for an affordable fee-to smaller firms, liquidity flows as freely as it ever has. That is also evident when, as Mazur observes, most remaining untapped liquidity is from existing sources rather than new discoveries. If liquidity is no longer fragmented or divided into a two-tier market, one can only conclude the markets have indeed become one giant free-flowing liquidity pool, regardless of how many pipes it takes to make it so.

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