Sourcing Liquidity in Fragmented Markets

Abstract

As a large participant in global asset markets, Norges Bank Investment Management has to ensure that our liquidity sourcing strategies reflect ever-changing market conditions. In particular, off-exchange trading volume has evolved and increased in recent years, requiring new strategies to successfully access this liquidity potential. Much of this volume occurs in trading venues that have limited pre-trade transparency – often referred to as ‘unlit’ or ‘dark’ venues. These venues have emerged to address two distinct developments in global asset markets – the increased ‘institutionalization’ of asset management on the one hand, and the advent of computer-based trading and the emergence of new forms of liquidity providers such as high-frequency traders on the other. Based on our own investment and trading experiences, we evaluate whether trading venues with limited pre-trade transparency contribute to well-functioning markets, and present a wish list of venue characteristics.