European equity trading volumes are much higher than reported, yet traders still struggle to see, let alone tap, that liquidity, because of fragmentation baked into MiFiD rules. Practitioners are calling for urgent reform.
After years of hand-wringing over declining liquidity and primary listings in Europe, new research indicates that liquidity is much greater than previously thought. And yet, “visibility of liquidity is challenging for European stocks”, complained Fabien Oreve, deputy global head of trading and securities finance at Candriam, speaking to the TradeTech audience.
“If you look into market data systems, you will find different ways to measure this liquidity and different ways to calculate average daily volume or ADV of the stock. If you ask five brokers for the ADV over European stocks, you will likely get five different answers”, Oreve added.
“What is the availability and addressability of liquidity in the European system?” echoed Huw Gronow, head of dealing at Newton Investment Management.
“We’re still having trouble defining that, it’s an internal debate amongst market practitioners. We can’t scale portfolio trades until we see true liquidity.”
This contributed to the malaise in the primary market, complained Bjorn Sibbern, CEO of SIX Group. “Companies listed in Europe need to see the total trading volume in their shares every day, and that’s not possible because of the fragmentation between exchanges, MTFs, OTC, SIs. We don’t have a clear, full picture today”.
The problem is widely acknowledged. Buyside desks still receive prints in half-a-dozen venue formats, FIX flags vary by broker, and when dealers internalise a client-to-client swap the trade never prints the tape. Add the fact that large Systematic Internaliser (SI) prints may be published with a delay, and metrics of “addressable” volume quickly turn fuzzy.
“It’s a slippery slope: the reference price becomes so degraded that we lose faith in it”, warned
Jupiter Asset Management trading head Mike Poole.
“Mid-price only works while real risk still prints on the tape; without it, equities could drift toward RFQ-style credit trading.”
Why “addressable” liquidity is understated.
In an unpublished paper that is attracting attention from industry practitioners, Laetitia Visconti, head of market structure at Aquis Exchange, claims to have tackled the measurement problem in detail. Analysts, she told Global Trading, routinely treat only on-exchange volume as addressable and ignore the bilateral prints that are now both automated and executable in size.
“We need to move on from the narrative that only on-venue trading is addressable in Europe. We have seen material growth and automation in bilateral liquidity, often at the detriment to on-exchange volumes. This makes our markets look smaller instead of acknowledging that there has been a redistribution of the volumes over the past few years. Looking at the data and unpacking it, we tried to estimate how much of the off-venue activity should be considered when assessing European volumes.
First, we removed anything flagged ‘Non Price Forming Trades’ which are about 18 % of the CBOE Europe All-Companies total volume. This is clearing activity. Out of what is left, we looked at the nature of the print: no special flag? At the close? Likely those trades are addressable and accessible.
The result? You get a market at least 30 % bigger than you initially thought. This could make a material difference to how European markets are perceived by investors, at a time when we are competing on the global stage to grow our capital markets.”
Visconti’s method matters because it assesses the bilateral surge as a proportion of European equity trading into both volumes to reclassify using better flag mapping and volume to discard as non-addressable. Overall it presents the addressable volumes a lot higher than first thought when examining headlines numbers.
Remove the noise in addressable liquidity data, keep the obviously genuine trades, and Europe’s perceived liquidity pool jumps by a third. This correction could also influence index weights, execution costs, and even listing decisions.
Even sophisticated flags filtering cannot compensate for prints that never occur. Participant at Tradetech mentioned that a growing slice of equity trading is now exchanged internally at brokers via swap-for-swap crosses between customers; those positions novate on derivative books, so no cash print ever hits the public record. That silent volume, along with delayed SI disclosures, leaves a hole in every liquidity heat-map that buyside desks rely on.
Given these problems, a European consolidated tape is seen as more urgent than ever. Jon Relleen, director of infrastructure and exchanges at the UK FCA told delegates the UK has shifted “from reviews to delivery,” placing real-time bond-then-equity consolidated tapes in his top three priorities for the next two years.
Brussels is moving in parallel, but speakers warned that unless both jurisdictions insist on the same data schema, and the same near-instant deadlines, Europe will simply swap one fragmented view for another.
