Jim Leman is managing director and principal of Westwater Corp., a New York-based management and technology consulting firm focusing on the financial services industry. Before becoming head of Westwater's Capital Markets Practice, Leman was head of programme and algorithmic trading initiatives at HSBC Securities. Prior to that, he was president of SunGard BRASS and was managing director of Electronic Trading and Connectivity at Citigroup.

Ravi Manchi is a principal and head of Westwater Corp.'s Global Delivery & Business Strategy. Manchi and his team serve several major financial firms providing enterprise-wide solutions for front, middle and back office (including trading systems, liquidity connectivity, clearance and settlement, eCommerce, CRM, compliance and risk management, and business intelligence (MIS)).

Over the last six years, liquidity has been an increasingly difficult commodity to detect and access in an electronic trading landscape that has become more and more fragmented. The growth in direct market access, program and algorithmic trading solutions has diffused the opportunity to detect liquidity--whether block level or sub-1000 shares.

And as if multiple exchanges and ECNs weren't enough, internalization options provided by brokers have mushroomed. Many of these systems have evolved into alternative trading systems (ATS), where liquidity is reported to reside but cannot be seen with the naked eye. A diverse group of more than 30 of these new liquidity points has further complicated the electronic trading playing field for both buy- and sell-side firms.

Faced with this level of complexity, the stage is set for a new discipline, "liquidity guidance or consulting" to emerge to address traders' needs in this new era of Regulation NMS and its associated market structure realities.

The Buy Side's Challenge

To contend with this more complex and abstract world, buy-side firms must, as always, know the construction of their portfolios, the names they hold, the size of their usual trading activity, and the expectations of portfolio managers and trading management. In addition, firms now need to understand the nature and idiosyncrasies of the different pools of liquidity, so they can formulate strategies that match their appetite for stealth and their willingness to be patient, and take advantage of the optimal mix of these liquidity points.