Low Touch, High Liquidity
By Ryan Chan, Senior Equity Trader; Barney Pink, Equity Trader; and Taylor Doughty, Equity Trader, Janus Henderson
Janus Henderson Group (JHG) has about 302 billion USD of assets under management. We specialize in active management across all major asset classes. Given the global nature of our operations, the trading team is split across three continents: Denver (US), London (EMEA) and Singapore (Asia), offering 24-hour trading capabilities to the group. Traders from each region work closely together to make sure service to fund managers is seamless. Though the bulk of the flow we handle is cash equities, the team also covers convertible bonds, FX, and listed and OTC derivatives.
The team advocates utilizing technology to create greater efficiencies and is constantly evolving its execution style to adapt to market conditions. We were early adopters of electronic trading, which started as a way for buy-side traders to get direct market access anonymously and has evolved into an integral part of an asset manager’s execution arsenal. Technology advancement and innovation laid the foundation for improved connection speed, smart order routing, dark pools and machine learning. As algos become better and smarter in their execution logic, more can be done on sourcing block liquidity via electronic means.
Markets have been tough in 2022, with the Hang Seng China Enterprises Index (HSCEI) back at 2009 lows, STOXX 600 median daily volumes and average trade-sizes at three-year quarterly lows, further fragmentation in off-exchange liquidity in the US, and the rise of retail traders. Given this environment, it has been a challenge to traders at JHG to seek liquidity capture with minimal impact.
Not only have overall volumes decreased but we are also observing that participants are becoming more passive in nature. The amount of block trades executed above large-in-scale (LIS) has decreased over the course of the year, with September more than 50% lower than at the start of the year, and some estimates show that more than half of market flow is participating at less than 5 percent of volume. This presents a challenge as an active asset manager where our execution style is more urgent, with implementation shortfall considered as the primary benchmark.
To overcome these challenges, the desk continuously evaluates new and existing sources of liquidity, as well as the technological tools at its disposal to interact with the market in an optimal way, to add value to our order flow. In the recent past, this has included automated access to central risk liquidity and external electronic liquidity providers (ELPs) as part of our customised range of tactical algorithms, as well as through actionable indications of interest (IOIs). As ever, our focus remains on the quality of liquidity offered and the sustainability of execution. So far, we are pleased with the results, and we look forward to the continued development of this partnership with the sell side.
The closing auction is also a key focus given its importance in European trading, where it represents the largest liquidity event of the day. We are closely monitoring developments made to provide alternatives to primary closing auctions, such as innovation from multilateral trading facilities (MTFs) and Trading at Last (TAL) mechanisms. While volumes remain subdued, there is clear pressure on the incumbent exchanges that have historically dominated in this area. We remain reserved about the potential for further fragmentation and the impact alternative venues may have on price formation. Nevertheless, we embrace innovation in this area such as opportunistic close algorithms that dynamically scale participation rates at favorable levels.
NEW LIQUIDITY SOURCES
In the U.S. since the start of the pandemic, markets have only further fragmented and liquidity, predominantly on exchange, has deteriorated. To adapt to this changing landscape, our global desks have been front-footed to adopt, or at least test, new and innovative ways of sourcing liquidity electronically. One example of this was being an early adopter of single-dealer platforms, or SDPs, to connect directly to wholesale market makers in our algos. Accessing retail flow through these counterparties was, at minimum, challenging and not something many institutional traders were capable of doing. Many were also skeptical about exposing their orders to these types of market participants due to information leakage. By including SDPs in our toolbox, we were able to add an alternative to traditional exchanges and ATSs as it makes sense. In short, it was a win for us as liquidity-seeking traders when dealing in names with high retail participation, as we are now able to tap into liquidity that had previously been inaccessible thus improving our overall execution.
In addition to elevated retail volumes, institutions have become more elusive in their trading with an increased usage of schedule-based algos. This, in turn, has led to a decline in block liquidity and as a result, orders are being chopped up and traded in smaller and smaller quantities over the day. Several innovative efforts are beginning to take hold to address the growing issue of institutions being unable to find natural liquidity for blocks. These new innovative processes allow institutions to trade blocks algorithmically with orders being matched over a time series, rather than a set price within the spread with each side of the trade choosing their participation rate. Some of the more recently launched trading venues are gaining more traction with market participants, and we have begun to implement their strategies into our algos.
In Asia, dark pools and blotter scrapping crossing networks have been the main tools for sourcing liquidity electronically for the past decade. These two tools can work in tandem and provide different advantages when executing. While average fill size tends to be smaller in dark pools, they can be used to not only source liquidity but generate price improvement in scheduled and percentage-of-volume (POV) strategies. Blocks in crossing network tend to be bigger in notional, or ADV but must be done at current mid-price. These are the two foundations of seeking liquidity via low touch channels.
In recent years, sell-side providers have recognized buy side’s thirst for liquidity and subsequently enhanced their offerings. Dark pool aggregation has gained in popularity and with the introduction of conditional order routing, it should further improve block liquidity within dark pools. Conditional order routing, still in its infancy in Asia, has the potential to consolidate fragmented liquidity across brokers’ flow as it has done in the US and EMEA. Paramount to its success will be broad buy-in from eligible Asia-based market participants.
To complement these channels, the Janus Henderson trading team leverages vertical integration between block, high and low touch desks on the sell side. Our sales trading coverage receives notification when specific algorithmic orders meet predetermined ADV thresholds. This helps to ensure that we don’t miss out on any block opportunities that may be crossed away on the high touch desk, and we reward brokers through the evaluation process when successful blocks like this occur. At Janus Henderson, we have a consistent global approach with tools catered for specific regulatory and microstructure environments. Each region utilizes a broad spectrum of electronic tools to enhance liquidity-seeking capabilities, and we actively share knowledge across the firm to help improve liquidity sourcing channels.