What should regulators’ focus be to foster more growth in Europe?
In comparison with the US, China, Japan and some of the MENA markets, European traded volumes went from representing around 15% over that universe in 2018 to just about under 10% today. That gives you a flavour as to the environment that we’re navigating.
Regulators are focusing on a broad range of areas already, but regulation alone will not boost the market. However, the appropriate regulations can foster an environment that supports market growth, but also market resilience when conditions are challenging
The consolidated tape has been spoken about a lot as a way to encourage more volumes. I think the impact of it will be more engagement, better informed discussions between market participants and their service providers, and certainly accessibility to a broader investor base. You have new generations who are much closer to data and to the market and a consolidated tape could be instrumental to foster further interest in investing.
Another area regulators are focusing on is primary markets and the listing regime. A lot of effort is going into enhancing rules to encourage equity financing, including lowering the costs of listing, and not just the explicit costs of coming to market but also those frictional costs caused by requirements that may not be additive to the process of listing. There has been a recognition that there needs to be a balance between reducing those costs but also remaining vigilant to ensure that the quality of issuers coming to market is maintained.
An additional factor that gives us a flavour for where regulators are looking at when it comes to trying to foster European financial markets is T+1. The US decided to go into a T+1 settlement cycle, scheduled for May 2024, and the UK and the EU are currently looking at this from the lens of how to better position the region considering global trends.
The elements that are preventing growth in traded volumes should be addressed as well and those are not just regulatory but perhaps more fundamentally around the growth of the EU, the growth of the UK, and questions around their future relationship.
More certainty around that growth trajectory will potentially encourage more investors to engage with Europe as a source of capital, but certainly the ease of navigation when it comes to looking at the regulatory framework and the availability of different types of execution mechanisms will be instrumental in appealing to international investors.
What is driving the next stage of innovation in equities?
We’ve never had so much data at our fingertips. The industry is still trying to come to terms with how to utilise it to its full potential. Clients and infrastructures are increasingly reliant on data and the interaction amongst market participants is largely performance centric.
Cooperation across buy-side, sell-side and market infrastructures will be fundamental in determining what the next wave of innovation is going to be. As an example, access to data is still very expensive for a number of firms, so even though we have a lot of data available the access to it varies according to the resources available to consumers. The lack of data standardisation and harmonisation of the data, and how we understand and interpret it remains to be a challenge for a number of market participants. If you ask five market participants what the size of the European market is, you will likely get five different answers. The innovations that will change how we think about equities markets in Europe will be those that allow it to harmonise and bring together an understanding of European markets, volumes and trading dynamics that is accessible to most market participants.
This is an area regulators have been working on as well. We’ve seen a lot of changes to post-trade transparency requirements which try to simplify the way market participants are tagging the data so that when it comes to post-trade reports we have a better understanding of what is addressable liquidity and the proportion of the market that represents non-addressable types of activity like negotiated trades, benchmark trades, etc.
There has been bit of a learning curve for the industry as a whole to try and come up with ways to converge in how we understand liquidity. Those changes that we’re seeing from the regulator in terms of tagging data will be helpful in cleaning up some of the noise that we still have today. Once the data is cleaned up and more easily accessed by different firms there will be inevitably a process of higher automation because there is higher confidence in the quality of the data.
Are market participants still conscious of regulatory divergence between the UK and Europe post-Brexit?
Divergence was top of mind in 2021. There was a concern that the broader and more volatile political narrative would be reflected in those approaches to financial regulation. There was a lot of talk about whether or not one jurisdiction was going to seek to enhance their regulatory framework to become more competitive or gain market share over the other jurisdiction. So far that hasn’t been the case. There seems to be a recognition that in order for Europe to grow, the UK and EU still need to grow together, and it’s not a zero-sum game where one jurisdiction loses market share and the other will be the expected recipient of it.
The potential concerns around divergence have been diminishing over the past couple of months as we have seen the processes of regulatory reassessments develop. I think the focus now is more around the actual detail of the regulation, how it will be implemented and the unintended consequences of lack of harmonisation.
The timing of the changes is a really critical point that illustrates divergence risks. Let’s take T+1 as an example: This is a change that in theory would be easier to deliver in the UK because the post-trade infrastructure in a post-Brexit environment is very similar to the US. It’s more simplified than the EU, where complexity in the post-trade space is high. Considering there are still a lot of ties between the UK and the EU (for instance when we think about trading European baskets), a lack of harmonisation in the timing and the implementation of T+1 would translate into higher costs and liquidity implications for market participants.
Another example is the CT, where the UK and the EU will operate separate tapes. We know that the EU is favouring a consolidated tape that is post-trade, one level of pre-trade transparency, and that is anonymised. We don’t really know what the outcome of the consolidated tape in the UK will be, but possibly not the same.
In addition, if we’re looking at the RTS 1 changes in post-trade reporting they are slightly different in the UK and EU so there is a natural concern around the comparability of both markets. At this stage, we have shifted focus to the detail rather than whether or not we are going to have a framework that will be informed by the more political climate. When we look at the region from the perspective of an international investor the variances in implementation will require a more careful conversation as to the nuances of each market and approaching them as separate markets in a very similar way to way that we look at other regions like Asia, where markets are typically assessed independently from one another.