PlatformNov 7 2018

The makings of a market maker

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The makings of a market maker

Good client outcomes lead to further client engagement and having a focus on service can help to build long-term trusted relationships.

To be successful in a competitive trading landscape, businesses must effectively evolve their proposition to the changing needs of their customers.

Building a close relationship with clients means they will rely on firms to adapt their offering and ultimately fulfil the demands of their own clients. 

Initially we focused on the retail broker, the smaller order: the clients big banks were not interested in dealing with.

This continuity of high-quality execution is how to build a reputation as a trusted market maker. 

However, with time and technological advances this client base grew to include wealth managers, institutions, registrars, hedge funds and more recently the large investment platforms.

A good market maker must also evolve to changing investor needs. In 1994 we offered fixed income trading in retail size, European and North American trading followed in 1999, investment trust trading, research and corporate advisory in 2002, exchange-traded fund trading in 2006 and then Winterflood Business Services (our fully outsourced dealing and custody model) in 2010 – all in response to evolving demand to widen the investment universe. 

Key points

  • Good client outcomes lead to further client engagement
  • Market makers face testing conditions
  • institutions are keen to tap into the retail order flow

A market maker

Providing a consistently reliable service is the cornerstone of building long-term trust in the institutional and retail markets. Market makers should demonstrate meaningful liquidity and the willingness to make a price ina range of sizes for UK, European and North American securities, even during the most volatile market conditions.

From the Asian crisis (1997 to 1998) and the Dotcom bubble (1999 to 2000) to the most recent financial crisis, market makers have faced testing conditions. But it is in these climates of elevated volatility and extreme market conditions market makers must be able to show a commitment to making two-way prices and reducing the market impact of large orders.

This continuity of high-quality execution is how to build a reputation as a trusted market maker. 

Following the financial crisis, we have had relatively benign conditions, but market makers must be ready to assist clients in navigating the next inevitable period of market flux.

Our experience has taught us that seeing the bigger picture and always offering a reliable service throughout even the choppiest of markets – market crashes included – assists our clients in their own service offering. Ultimately, orderly markets breed confidence in markets and this is a virtuous circle. 

Meet the liquidity challenge 

Over the past 30 years, while the tides of liquidity have ebbed and flowed, and market structure has become ever more fragmented, ensuring constant delivery of pricing and execution is important.

Even during leaner periods, our unique mix of liquidity from corporate programmes, retail and institutional order flow, in addition to our own risk capital, has helped firms with both retail and institutional-sized orders achieve best execution. Obtaining sufficient levels of liquidity is paramount for institutional clients.

Retail order flow is a substantial part of the UK equity market and it is natural that institutions – which are worried about market impact and achieving the right outcomes – are keen to tap into this. 

Having a trusted partner with a large retail presence and ability to commit capital and facilitate large trades with minimal impact is becoming increasingly appealing to this institutional segment. Regulation is also putting the client experience at the forefront of the industry and market makers can help clients comply with regulatory change.

Providing best execution should always be at the heart of market makers’ propositions. However, with strict rules now shaping the trading landscape market makers should ensure clients are ready for the expected challenge that the Marketsin financial instruments directive II presents.

We have learnt that ‘transparency equals trust’ and that reputation is everything. It can take years to build a relationship and only seconds to destroy it. Integrity is the backbone of what the regulators are implementing, and this should be part of any firms’ cultural values.

Our clients were heavily engaged with us throughout the implementation of both Mifid I and Mifid II, consulting with us on a number of areas from execution and fragmentation through to transaction reporting and unbundling of research commissions.

By providing timely objective insight and support, a market maker can assist clients in navigating an increasingly complex environment. 

Investing in people and IT 

Tech disruption has arguably been the greatest driver of change in the trading industry over the last 30 years. 

From the City’s Big Bang, which laid the foundation for London to emerge as the pre-eminent centre of international capital, to RegTech, which is transforming regulatory infrastructure to ensure technology is embedded at every level of operation, firms have faced myriad challenges.

This is not even considering how the rise in digital solutions, apps, the drive for open application programming interfaces and blockchain is impacting the investment world. 

A successful market maker must develop technology and trading capabilities to satisfy the evolving demands of their client base and a rapidly transforming landscape. 

The key is finding the right blend between experience, people and technology if you want to deliver a leading-edge trading service. 

By tapping into a market maker with these capabilities, platforms, advisers, institutions and asset managers can focus on their core competencies and deliver added value to the client experience.

Ben Jowett is head of business development at Winterflood Securities