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Our perspective on sourcing liquidity in fragmented markets

In a newly published Asset Manager Perspective we evaluate whether liquidity pools contribute to well-functioning markets, and present a wish list of venue characteristics.

17 April 2015

Sourcing liquidity in fragmented markets

As a large participant in global asset markets, Norges Bank Investment Management has to ensure that our liquidity sourcing strategies reflect ever-changing market conditions. Liquidity pools with limited pre-trade transparency have grown in importance in recent years. We categorize these venues, evaluate whether they contribute to well-functioning markets, and present a wish list of venue characteristics.

We believe that liquidity pools fulfil an important and beneficial role in modern equity markets. They complement the price discovery process that is the domain of lit exchanges by providing opportunities for block liquidity.

– These are critical for a market dominated by trading emanating from large, institutional participants, and can limit rent extraction by market intermediaries,. They are effective in bringing together natural institutional trading intentions, and will become increasingly important in a largely institutionalized asset market, says Chief Investment Officer Asset Strategies Øyvind Schanke.

At the same time, we believe that greater transparency around the operating procedures of both liquidity pools and exchanges is needed. There is need for transparency around the order types and their matching priority including exchanges’ hidden order books. We are in favour of further transparency about operating procedures and available order types, particularly if they differ by client.

Norges Bank Investment Management favours the development of utility-like, transparent and simple block crossing venues.

The Asset Manager Perspective series articulates Norges Bank Investment Management’s views and reflections on issues topical for the financial industry. They are not meant to be definitive, rather they are intended as timely contributions for the benefit of all market participants. The series is written by employees, and is informed by our investment research and our experience as a large, long-term asset manager.