The paper discusses key developments in the evolution of markets: consolidation of exchanges, institutionalisation of the asset management industry, and fragmentation of liquidity leading to increased complexity and alternative trading venues. It also provides a perspective on the exchanges' key role in safeguarding the liquidity risk premium, and as the arbiter of a transparent price discovery process.
– We view the automation and latency speed race of exchange development as coming to a close. The next phase is developing innovative solutions that are appropriate for today's institutional investor mix, says Øyvind Schanke, Chief Investment Officer Asset Strategies.
The paper addresses some of these solutions, including experimentation with alternative pricing models (re-visiting maker/taker structure) and order types (size vs. time priority), and alternative ways of trading (block crossing between buy side firms and intra-day auctions).
Norges Bank Investment Management is already adapting to the new landscape.
– Institutions like us are patient. We have started to shift from algorithmic to more block executions for lower market impact costs, says Schanke.
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.