Fragmented markets, unified solutions: Tackling liquidity with LSEG

Traders often face pressure in accessing, analysing and managing liquidity effectively. Part of this pressure stems from market fragmentation and market participants need to find ways to analyse and access liquidity more effectively. 

• Liquidity considerations typically play a key role in shaping one’s investment and trading strategies.
• Liquidity is not uniformly available and can often pose challenges to market participants.
• LSEG Workspace provides a holistic view of liquidity conditions helping to ease some of the concern.

Liquidity—the ease with which assets can be bought or sold without affecting their price—is a fundamental concern for participants across the financial markets. However, liquidity is not uniformly available and presents significant challenges, varying by market conditions, asset classes, and the roles of those both providing and consuming it. Traders, fund managers, execution specialists, and other market participants all face unique pressures in accessing, analysing, and managing liquidity effectively.

On the buy side, fund managers are often the starting point of the trade lifecycle, with liquidity considerations playing a pivotal role in shaping their investment and trading strategies. When originating trade ideas and constructing portfolios, a key consideration is whether the market can absorb their intended trades without undue impact on prices. For less liquid securities, this can restrict position sizing, dictate execution timing, and even lead to missed opportunities. Ensuring liquidity is sufficient to meet investment objectives while maintaining best execution is therefore a delicate balance.

In many markets, traders and execution specialists tasked with implementing the portfolio managers’ decisions face the complexities of fragmented liquidity. With assets trading across multiple venues, whether lit markets or dark pools, such fragmentation can introduce implicit costs such as slippage, particularly when compounded by volatile market conditions, which can further erode performance. Traders must therefore select the most appropriate execution channels to minimise costs and market impact. 

The challenge is how to bridge the gap between client intent and execution outcomes, so that investment strategies are aligned with the realities of market liquidity. To ensure that orders are executed efficiently, execution specialists must therefore continuously monitor evolving market dynamics, trading venues, and shifts in liquidity profiles to stay ahead of the curve, considering both the implicit costs and explicit costs (e.g., taxes, commissions and exchange fees). On the micro level, they also must delve into how venue-specific features—such as auction mechanisms or conditional orders—affect the availability and quality of liquidity when routing an order to a particular counterparty or venue, taking variables such as time of day and market conditions into account.

Effective liquidity management involves a good deal of collaboration. Fund managers rely heavily on their dealing desks to validate the feasibility of trades, leveraging traders’ real-time knowledge of liquidity conditions. Traders, in turn, work closely with brokers, counterparties, and other liquidity providers to source liquidity across venues, tailoring their execution strategies to meet the clients’ specific needs. By assessing market conditions and utilising advanced algorithms, the aim is to ensure that trades align with client benchmarks, which might mean capturing block liquidity discreetly or optimising execution costs for large baskets of orders, for example. 

To reduce friction and enable timely adjustments to strategies, whether using algorithms or high-touch channels, firms across the buy side and the sell side leverage a combination of expertise, advanced tools, and technology. This is where the London Stock Exchange Group (LSEG) plays a pivotal role, in providing market participants with the infrastructure, the cutting-edge tools and the insights necessary to analyse and access liquidity more effectively.

LSEG’s Workspace platform, which integrates real-time market data, analytics, and trading tools, offers users a holistic view of liquidity conditions. Traders can monitor intraday volumes, compare execution venues, and assess a wide range of metrics critical to finding optimal liquidity. To address fragmentation for example, LSEG Workspace offers tools like Intraday Market Share Reporter and Intraday Volume Analytics apps, enabling participants to pinpoint where liquidity is concentrated and how it can be accessed. These insights are invaluable for both pre-trade planning and post-trade analysis, ensuring that participants not only locate liquidity but also understand the costs and effectiveness of their execution strategies.

Liquidity fragmentation has driven the adoption of sophisticated execution algorithms, with traders increasingly using liquidity-seeking algos to navigate fragmented venues and capture liquidity while minimising market impact, and smart order routing to help direct trades to venues where liquidity is most readily available or cost-effective. LSEG supports these technologies and activities with robust data and analytics, ensuring that algorithms operate with the most accurate and up-to-date information, and that market participants can adapt quickly to evolving conditions, whether executing in high-touch or low-touch environments.

A cornerstone of LSEG’s approach revolves around transparency and interoperability. From a transparency perspective, LSEG provides a wealth of reliable and detailed market data, including insights into venue-specific features, from lit continuous markets to conditional venues, enabling participants to select the best environment for their trades. And through integration with OpenFin, LSEG Workspace will allow seamless plug-and-play interoperability between LSEG’s tools and a wide range of other desktop applications, providing further analytical capabilities and liquidity insights. The integration of other collaborative technologies, such as Microsoft Teams within LSEG’s ecosystem, will further streamline communication and decision-making for trading teams.

Looking ahead, LSEG is increasingly leveraging artificial intelligence (AI) and machine learning to enhance predictive analytics for liquidity. These innovations are helping traders anticipate shifts in market conditions and respond proactively, ensuring they stay competitive in an increasingly dynamic environment.

Liquidity challenges are an inherent feature of modern financial markets, affecting participants at every stage of the trade lifecycle. From fund managers grappling with position sizing to traders navigating fragmented venues, addressing these challenges requires a combination of expertise, collaboration, and technological innovation.

LSEG’s suite of tools and solutions plays a crucial role in this ecosystem, by offering market participants the insights, connectivity, and resilience they need to access and analyse liquidity effectively. By fostering transparency, enabling collaboration, leveraging interoperability, and driving innovation, LSEG not only supports today’s liquidity needs but also positions itself—and the markets it serves—for a more efficient and connected future.