The move by Barclays and then Deutsche to allow clients to put bids and offers onto their proprietary platforms is highly significant. Nobody from the sell side will, at least for the moment, say that they pose a threat to the multibank platforms but clearly they do. That threat extends to EBS, Reuters and the CME, although the need for an outlet for liquidity that cannot be matched up internally does provide these venues with a degree of protection.
It’s taken me a while to grasp but the concept of what is the liquidity mirage has fundamentally changed. It is becoming evident that true liquidity is not the simple redistribution of a price from one platform to another. True liquidity is built on natural interest.
Much has been made about the emergence of new liquidity providers. However, I wonder how many of these will make a market when they don’t know, within a pip or so, where a spot rate is. The banks are driving business back on to their own platforms and building up their internal liquidity pools. Most of the buy side won’t mind; they’ll still have access to tight prices and they won’t have to pay commissions. The explicit cost of trading remains extremely important for many; the implicit cost is of more concern to the “liquidity repackagers”, as I shall call them. The sell side has faced many pressures from nimble upstarts, particularly those that have been able to take advantage of latency to arb them. It will be interesting to see how the snipers and repackagers fare in the next few years.
