CMC Markets PLC (LON:CMCX) said a white paper commissioned by the trading platform operator has underlined a “distinct polarisation of attitudes” regarding the role played by non-bank liquidity providers (NBLPs).
The company, itself a non-bank provider of liquidity and white label trading solutions, said it has been developing its role as a NBLP in recent years, although it added that polling of sell-side brokerages revealed “widely differing understandings of what the new wave of market participants had brought to the table in recent years, suggesting there’s still the potential for many to make significant efficiency (and commercial) gains”.
“With many respondents holding onto the belief that non-bank liquidity providers are simply unable to price consistently, especially when markets aren’t functioning normally, this displays a now dated reality – and a point which was tested in the depths of the pandemic-induced volatility crisis”, CMC said in the report.
“Non-traditional liquidity makers including CMC Markets played a key role in maintaining an orderly market during COVID-driven volatility in March 2020. This was most notable when gold prices threatened a dislocation as demand for safe haven assets soared whilst precious metal refineries and distribution networks were badly constrained”, the company added.
CMC also said key findings of the report included that NBLPs helped to reduce latency, an innovation that has had a “positive impact across the market”, and also that the NBLP institutions “do genuinely act as proxy wholesalers of liquidity”.
The company added that while digitisation has clouded the picture, the report found that the most efficient NBLPs still added value.
“Whilst the whitepaper certainly provided support for the role played by non-bank liquidity providers, this view was far from universal. There was a perception from some that they increased costs, whilst self-proclaimed traditionalists also expressed concern that they simply didn’t want a counterparty who is considered part of the retail world. However, given market efficiencies and the scale of internal order books both built from retail and other institutional clients, this arguably shows a rather dated view”, said Richard Elston, CMC’s group head of institutional.
“The liquidity market remains ripe for further disruption. This research shows that even if there are some traditionalists who are happy with the status quo, many participants are ready to adopt change and others want to see even more innovation. Further evolution in how liquidity is constructed seems inevitable”, Elston added.
Shares in CMC Markets rose 2.4% to 358.5p in lunchtime trading on Monday.