Ownership figures suggest sliding market quality
A substantial portion of equity trading doesn’t result
in shares changing hands, due in part to a disproportionate focus by exchanges
on high-frequency trading (HFT) activity, according to Peter Randall, CEO of retail-focused
trading venue Equiduct.
“An enormous amount of the flow that goes through the
market today doesn’t actually result in a change of beneficial
ownership. By value we believe that only about 35% of trading results in
shares actually changing hands; by number of trades executed this we believe is
about 2%,” Randall says.
The figures Randall cites were drawn from the European
Central Bank’s stock data warehouse, and set against total settlement values
from Federation of European Securities Exchanges.
The numbers indicate a significant portion of market
participants trade simply for price arbitrage rather than actually acquiring
“At the broad market level there is a major portion of
activity that doesn’t pass down from central counterparties (CCPs) into central
securities depositories (CSDs). The trades are either flattened by HFT
firms or netted off against each other in the CCP and don’t result in
settlement,” Randall says.
So what does this mean for the quality of markets and
liquidity provision? Randall contends that the quality of flow is seriously
affected by HFT firms that typically aim to end the day flat and rarely hold
As such, the limited proportion of shares that
actually changes hands renders the price paid for equities unreliable.
“There are very real consequences for market quality.
Only a small portion of trading on markets results in real flow. Markets have
become very sensitive to price setting flows which are declining,” Randall
The advent of liquidity fragmentation has seen a
proliferation of technology-driven HFT players benefitting from price arbitrage
across venues, which has further affected market quality, while producing the
type of liquidity institutional investors can’t capitalise on.
“In an increasingly fragmented trading landscape,
institutions in particular might choose to say they don’t want their stock and
orders being exposed to those certain trading venues for price arbitrage
reasons,” Randall says, adding that venues, not HFT firms are to blame for this
apparent deterioration in flow quality.
The growth in venues offering new trading platforms
that seek to separate HFT from institutional trading , such as agency broker CA Cheuvreux’s multilateral trading facility
BLINK MTF, which only includes liquidity from the firm’s clients, thereby
excluding HFT and other proprietary flow and Tony Mackay’s
proposed social media-inspired venue MarketBourse. But Randall contends that
these venues are not a sufficient response the problem, while exacerbating
Randall believes the efforts of exchanges in courting
HFT players with ever-faster trading technology and rebates for posting
liquidity should be addressed in order to stem the rise of price arbitrage
strategies. According the Equiduct head, European venues need to focus on fostering
a positive trading environment with good quality liquidity and do more to
encourage new listings.
“If Europe is to grow itself out of the current
problems, it can only be helped by a deep, liquid and active SME marketplace
and it seems that platforms have forgotten their role of helping new companies
to raise capital,” Randall says.