June 8, 2021 | Stamford, CT — Market structure trends are making the economics of executing FICC product trades on multi-dealer platforms increasingly expensive, prompting buy-side and sell-side firms to explore new ways of interacting directly. 

While electronic execution has delivered cost and efficiency savings, a new Greenwich Report shows that electronification also introduces new costs such as brokerage fees, the impact on mark-outs due to data sales and information leakage, and unfavorable hedging outcomes. 

“Over the last few years, the dominant narrative has been that more transparency is a good thing, hence the focus on getting more execution on venues,” says Tom Jacques, Senior Research Manager at Coalition Greenwich and co-author of End-to-End Value Chain in Electronic Markets: A Costs- vs. Spreads-Driven Evolution. “This is largely true, but while transparency has increased, so have the fees earned by the intermediaries and the overall costs incurred by liquidity providers, which ultimately negatively impacts the end investor.”

To date, liquidity providers have absorbed most of these costs while trading venues, by charging fixed fees and commissions, have not experienced the same margin erosion and are capturing an increasing share of the value generated by electronic FICC execution. 

These challenges are leading liquidity providers and buy-side firms to consider alternatives to current RFQ-driven trading models executed across third-party platforms. In particular, liquidity providers are increasingly interested in bilateral connectivity directly into the execution and order management systems of liquidity takers. 

“Just as innovation paved the way for today’s multi-dealer platforms, technology is now creating new ways for liquidity providers and the buy side to interact directly,” says Subodh Karnik, Head of Client Intelligence Marketing at Coalition Greenwich and co-author of the report. “Coalition Greenwich expects continued consolidation across both the buy and sell side, where economies of scale are one of the only solutions to razor-thin margins.”