Liquidity Intelligence – Understanding the nature of liquidity

Liquidity Intelligence – Understanding the nature of liquidity

by Khalil Dayri, big xyt

Understanding the nature of liquidity

We know that trading behaviour, microstructure and liquidity all vary significantly between venues and across individual stocks. Understanding these differences has become a very important prerequisite to any market participant. Armed with this knowledge, traders can substantially reduce their execution costs, product managers can design better strategies and trading venues can improve their liquidity sourcing.

Traders and practitioners are always faced with the question of which venues to pick and how to rank them. The answer to that question is a little more complex than initially thought and the best short answer one can give is: well, it depends. We know that each venue has three important factors that influence the ranking: the speed of execution (or the number of trades per day); the distribution of order sizes and price improvement which measures the implicit costs of trading in the venue. These are all objective measures that can be approximated from public data.

These alone are not enough to rank the venue: the ranking depends on what the trader is trying to achieve and the level of urgency. We can help demystify this problem by taking all these factors into account and presenting them in a visual or tabular format, like the allocation map above ( showing a European large cap stock with minimum acceptable quantity of €5,000) that shows where each venue’s sweet spot is as a function of the order size.

Big XYT’s mission is to provide transparency to a very fragmented market, and we are today developing a new application that facilitates the venue selection and ranking process and that brings the power of an advanced SOR to the fingertips of the trader or the strategy designer.

The attached screenshot was created with our Liquidity Intelligence application developed to meet client requests to have an optimised view of block liquidity. We will be using this and other applications to continue to provide additional liquidity intelligence in future posts.

At big-xyt we can provide daily time weighted spreads & depth for users and algo developers in 12,000 instruments and all significant venues, as well as many other essential trading metrics.  If you are interested in letting us do some of the heavy lifting for your algo infrastructure please get in touch.

If you find these pieces of analysis useful, you will find there is a lot more you can do with our Liquidity Cockpit. Clients using our Execution Analysis/TCA are able to measure execution performance with the demonstrated precision and flexibility.

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During these unprecedented times we do not underestimate the professional and personal challenges that everyone is facing. There are far more important things to be doing in the community than looking at a screen. 

However, data and data analytics is playing a critical part in providing solutions to the current global crisis. Furthermore, the markets remain open and whilst they do, the trading community needs to be well informed in order to understand the changing market landscape. As a result, big xyt is receiving an increasing number of requests for observations of changing trends and behaviours in the equity markets. We are excited to have recently expanded our London team to enrich our content and support for clients seeking greater market insights from an independent source. Whilst many adjust to the new experience of working from home we plan to share some of these thoughts, observations and questions in the coming days & weeks. 

As ever we welcome feedback as this can shape further contributions from our team and the Liquidity Cockpit our unique window into European equity market structure and market quality.

We hope you enjoy them.

This content has been created using the Liquidity Cockpit API and other analytical tools developed for our clients.

About the Liquidity Cockpit

At big-xyt we take great pride in providing solutions to the complex challenges of data analysis. Navigating in fragmented markets remains a challenge for all participants. We recognise that the investing community needs and expects continued innovation as the volume of data and related complexity continues to increase.

Our Liquidity Cockpit is now recognised as an essential independent tool for exchanges, Sell-side and increasingly Buy-side market participants. Data quality is a key component, as is a robust process for normalisation so that like-for-like comparisons and trends over time have relevance. However, our clients most value a choice of flexible delivery methods which can be via interactive dashboard or direct access to underlying data and analysis through CSV, API or other appropriate mechanism.

For existing clients – Log in to the Liquidity Cockpit.

For everyone else – Please use this link to register your interest in the Liquidity Cockpit.

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