It’s no question that the liquidity landscape in Europe is not in the best state, but how did we get here? And how can we get out? Marc Wyatt of T Rowe Price warns that there will be no “big bang” solution, but it’s everyone’s responsibility to work towards a constructive evolution of the markets. Read on for a download on TradeTech’s liquidity conversations.
Individual changes may make some difference to the liquidity landscape, but there needs to be an understanding of the underlying issue in order for meaningful improvements to be made, according to Rupert Fennelly, EU head of equities electronic trading and sales at Barclays.
The last 20 years have seen considerable consolidation on the buy side, he continued, resulting in fewer viewpoints in the market. Other large changes have included the consolidation of hedge funds, which Fennelly stated now have a more sell-side approach and are trading less aggressively, and enhanced sell-side competition to include new algo functions and provide better performances. “These things will not change,” Fennelly
affirmed. “We have to live with them.”
From a buy-side perspective, “we’ve had to innovate with the marketplace”, reported Marc Wyatt, head of global trading at T. Rowe Price, and be more judicious with allocation of time and attention. Budget constraints are limiting innovation, he added, with the majority being spent on regulatory requirements. Top-of-house initiatives are the next priority, followed by the practicalities of “keeping the lights on”. These pressures will prevent small and medium firms from keeping pace with innovation, he explained, negatively impacting investors who need to use both small and large firms.
Panellists disagreed on exactly what stage the industry was at when it comes to innovation in the liquidity space. Sam Railton, managing director of business management for EMEA at Tower Research Capital Europe, stated that there has been a recent shift in attitudes towards and an understanding of alternative trading platforms. However in spite of these attitude changes, Simon Dove, managing director and head of liquidity for EMEA at Instinet, stated with certainty that “we’ve hit a crossroads”. He emphasised the need to make EMEA more appealing to international investors, especially at a time when the UK is seeing increased delistings.
Considering whether dark trading is a threat to liquidity, “I don’t think there are any concerns,” Dove affirmed. “We’ve welcomed it for a long time.” Similarly, Anish Puaar, head
of European equity market structure at Optiver, noted that “bilateral trading is not new”. However, he added, the industry is now taking the approach one step further with the introduction of automated trading between market makers and buy-side firms. “It’s a gradual shift, but it’s happening,” he affirmed.
Despite their recent success, Fennelly questioned whether bilateral block mechanisms will be able to maintain their liquidity offerings in the face of market shocks, given the fact that they have emerged in a subdued environment.
Attention was drawn to the need to print dark prices on EU tapes, following the US format. Chris Jackson, head of equities for EMEA at Liquidnet, explained that while lit markets often misprice assets, values on the dark markets “create the concept of fair value”.
Puaar assured that Optiver is not trying to overtake other execution methods, but is instead offering an alternative in the low-liquidity landscape; “not everything can be forced onto lit, dark and public markets,” he commented. This was a view broadly held by those on the panels, who acknowledged the importance of having multiple options available.
Jeremy Smart, global head of distribution at XTX Markets, agreed that optionality is vital for the market. “We’re not backing away from trading on venues,” he explained, but added that in the currency landscape lit market toxicity is a significant issue. With a lot of flow filtered out before it hits venues, he explained, “exchanges become a form of exhaust for the market”.
However, James Baugh, managing director and head of European market structure at TD Cowen, warned that although any method that plugs the liquidity gap will be accepted, the long-term impact on the market and on how liquidity levels are perceived by international investors needs to be taken into consideration. Following an audience question on the use of private rooms for trading, he responded that this would not create a fair and equitable environment. If business is taken away from public markets and less liquidity is visible, he argued, the market could end up damaging itself.
Eric Stockland, managing director and co-head of global electronic trading at BMO Capital Markets, believed that the market will “self-correct for the right amount of volume trading light, dark and periodic. It’s hard to say how much liquidity is too much off-exchange, but I think that market forces will solve for it in the long term”.
“This is always going to be an evolution,” Wyatt acquiesced. There is no single, immediate solution for the liquidity crisis in Europe – experimentation will be required. “One size does not fit all,” affirmed Dove. The industry needs a range of trading mechanisms to be available, and ultimately “the pie will grow together”.
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