The creation of private rooms where members can trade bilaterally behind closed doors and the impact this would have on liquidity was a key theme addressed at TradeTech Europe 2024, with panellists discussing whether such methods can be considered fair and equitable.
James Baugh, TD Cowen
“We’re not talking about multilateral trading opportunities. Therefore, it means that there’s clearly going to be more business taken away from the public markets,” said James Baugh, managing director, head of European market structure at TD Cowen.
“I wouldn’t necessarily say that a private room would be dissimilar to maybe some of the RFQ models that certain platforms operate, where you have that bilateral relationship, meaning that certainly one platform has taken some retail business out of the public markets by providing that sort of bilateral arrangement between market maker and retail.”
Baugh added that we have to be careful we’re not self-harming when looking for liquidity opportunities in a difficult market – highlighting, however, that whether it’s a private room, or another liquidity opportunity, one will not turn them away if they can plug that liquidity gap.
“Ultimately, longer term, what does this mean for our ecosystem? What does this mean for those international investors looking into Europe, thinking, well, where’s the liquidity? There’s nothing to be doing here. That would be my personal take on it.”
Countering this viewpoint, Anish Puaar, head of European equity market structure at Optiver, added: “Not all orders or all liquidity is suitable for public markets, whether that’s lit, dark, or periodic and you do need those alternative means of executing.
“It’s something we have to be wary of but we have to be careful with not trying to force everything onto public, lit or dark markets because we’ve seen before from regulatory attempts to do that, that doesn’t end well.”
Baugh added that fragmentation is great, however adding, “Let’s just all be mindful if it swings too far one way and if there is less addressable liquidity, that’s going to cause us longer term damage.”
The challenging European liquidity landscape has, unsurprisingly, been central to several panel discussions at the conference throughout this week.
Panelists speaking on Tuesday highlighted the importance of understanding what has led to current liquidity landscape issues in order to create viable solutions.
“Everyone in this room is to blame for the liquidity problem in Europe,” said Rupert Fennelly, EU head of equities electronic trading and sales at Barclays.
Innovation – although typically associated with ironing out the creases in markets – was highlighted by some panellists as detrimental to participants in some cases, creating more complexity for firms.
“We all want to innovate and some of that has unintended consequences,” said Marc Wyatt, head of global trading at T. Rowe Price.
“We have to be very judicious with how we spend our time and how we decide on our allocation. Unfortunately, if you gave a buy-side firm a large tech spend, 20% is going on regulatory compliance and the next 10-15% is going on keeping the lights on. Small and medium-sized shops are going to struggle. We have to be judicious with technology and talent in place.”
With the common understanding and agreement that the European liquidity is suffering, panellists discussed methods in which market participants can help combat this.
“For us and specifically looking into the market structure, not only in Europe and the US, I think shortening up the market hours would go a long way for helping liquidity for us,” added Wyatt.
Several panellists agreed that a shortening of the trading day would be beneficial to improving liquidity conditions, with multiple labelling it as one of the easier solutions to this issue.
“Shortening trading hours is definitely one that would be easy to achieve if we didn’t have resistance from some of the exchanges, because that makes total sense. There’s no reason why we take two hours longer to trade a tenth of the volume that trades in the US,” said Fennelly.
“We talk a lot about retail and retail involvement in the market. How can we expect people to back our market when we’re not willing to back it ourselves? Those assets need to be freed up to participate more in the capital markets, take more risk and also reap the benefits of it.”
Tying up the potential solutions to the European market’s challenges with liquidity, Baugh concluded with a showstopping final quote: “Consolidated tape for me [could be beneficial], transparency is key. I think it’s a real shame that one incumbent exchange has decided they don’t see value in a pre-trade consolidated tape.”