Sourcing liquidity across fragmented equity markets: a challenge for buyside trading

Sourcing liquidity across fragmented equity markets: a challenge for buyside trading

      In Europe, the issue of market fragmentation and its impact on liquidity is a constant concern and remains a major challenge for Natixis TradEx Solutions (NTEX).

Despite a moderate growth in the overall trading volume for the Stoxx 600, for instance, the nominal traded for the Stoxx 600 in 2024 exceeded that of 2023 by 6.04%, ending the year with a daily average traded of €38.6 billion versus €36.4 billion over the previous year. This is just the tip of the iceberg, though: the liquidity provided "elsewhere" was very strong.

NTEX plays a key role in the ongoing search for liquidity and the minimization of costs associated with this fragmentation (operational costs and technology costs related to data access and market infrastructure).

Maintaining execution performance in the face of thinning order books on regulated markets (or "lit venues") is a significant challenge, making this sourcing of liquidity more complex.

To this end, the shift of flows towards periodic auctions and systematic internalisers offers better execution results, with more favorable markouts in post-trade.

      However, this addressable liquidity (i.e., liquidity that can be interacted with on-exchange or off-exchange) is becoming increasingly difficult to grasp, as the market experiences a growing introduction of new platforms and trading venues. Several venue launches are underway or forthcoming: dark markets (Euronext, Xetra, BME), "Trajectory Crossing" (PureStream, CBOE VWAP X, Aquis), and periodic auctions (OneChronos).

      As a result of these observations, it is clear that the issue is not the absence of liquidity, but rather how to best seek it, and above all, to constantly ask oneself: where ?

•    NTEX is committed to identifying where flows exist and where they are traded in order to add value to its executions, i.e., determining where exploitable liquidity can be found in the face of its increasing depletion in regulated “lit” order books.
•    NTEX tends to increasingly utilize bilateral arrangements with brokers to optimize its executions through access to at-risk blocks; this allows for obtaining additional liquidity while minimizing market impact.

      Another consequence of this liquidity transfer is that bid/ask spreads in order books have increased by 30% in 2024. One plausible initial explanation for this phenomenon was a correlation with market volatility. However, divergences have widened, as volatility decreases while spreads continue to rise. It is therefore essential to closely monitor the correlation between the increases in spreads and the market share of lit venues.

This is why NTEX continues to:

•    Invest in pre- and post-trade data;
•    Continuously optimize and challenge its technological access to the market in order to seek out pockets of liquidity;
•    Focus on execution performance.

Christophe Dupuy
Head of Equity Trading
April 1st, 2025

DEFINITIONS:

1.    Periodic auctions: Trading mechanisms where buy and sell orders are aggregated and executed at regular intervals, rather than continuously.
2.    Systematic internalisers: Systematic internalisers execute client orders outside of a regulated market or a multilateral trading system.
3.    Markout: A measure of the execution quality of a transaction compared to the price movements in the market after execution.
4.    Dark venues: Also known as "dark pools," these trading platforms allow investors to trade large quantities of shares without revealing their intentions to the public market or "lit" venues.
5.    Trajectory crossing: An algorithmic trading technique aimed at minimizing market impact or achieving a specific cost or timing objective.
6.    Bilateral arrangements: Trading agreements between two parties, often conducted outside of organized markets.

The information provided reflects NTEX's opinion as of the date of this document and is subject to change without notice. References to specific securities, sectors, or markets in this document do not constitute investment advice or a recommendation. The information contained in this document is based on current circumstances, intentions, and orientations and may be subject to modification. Although NTEX has taken all reasonable precautions to verify that the information presented is from reliable sources, many of these details are derived from public sources and/or have been provided or prepared by third parties.