MarketsMuse update courtesy of extracts from 31 December story in industry mag Markets Media.com

The buy side is becoming more targeted with sell-side firms, employing a rifle rather than a shotgun approach as liquidity continues to shrink. A big factor behind this newfound independence has been the lessening of liquidity in 2014 in derivatives and fixed income markets, which has forced buy-side institutions to be more resourceful in sourcing liquidity

“The buy-side is more empowered and understandably, taking greater ownership of their execution and process,” Jennica Ross, managing director at execution firm WallachBeth Capital, told Markets Media. “Within those segments they are obviously narrowing the relationships that they have. They don’t need to have the plethora and the sheer numbers of external sell-side relationships that they had before, and the relationships they do have are now much more consultative.”

“The most surprising thing was how many market making firms basically closed up,” said Dave Beth, president and chief operating officer at WallachBeth. “The lessening of liquidity throughout the whole derivative landscape, both listed and the OTC, we see happening at a broad stroke. Clients should expect [spreads] in derivative markets to widen a little bit. I think it has a lot to do with regulation and with balance sheet usage in the bigger institutions.”

In WallachBeth’s ETF market making business, liquidity remains at high levels. “As far as the ETF cash business, one could say the liquidity is as great as ever and it continues to grow,” Beth said. “Whereas in the listed and OTC options space, there’s been an express decrease in immediately actionable liquidity. I think that it’s affected us no different than any other player. I think clients also recognize that the playing field is changing, and that it’s okay to pay a little bit of a wider spread to get their business done.”

WallachBeth continues to diversify its business in order to take up the slack left by the exit of larger sell-side institutions.

“While there’s been contraction of liquidity within the derivatives space, we’ve seen an increased opportunity from more clients who are getting involved in our other business units, whether that be equity, program trading or fixed income trading,” said Ross.

For the full story from Markets Media, please click here.