Should EU structure and regulation mirror the US more, how?
As an American, I need to think carefully about how I answer this one, or risk sounding like a cliche. I think both sides of the Atlantic can learn from each other, and from Asia too. While the US embarks on a huge initiative to reduce settlement risk, for example, India has already moved to T+1 settlement, and China to T+0. However, when it comes to trading and liquidity, one of the things that the US has done well is putting the mechanisms in place to enable the creation of a ‘distributed market’.
Through the Security Information Processor (SIP/consolidated tape) and the National Best Bid and Offer (NBBO) rules, the US has created a unified order book across multiple venues and exchanges. The risk of a single point of failure is significantly reduced as the market is no longer reliant on a single exchange to determine price. Furthermore, this structure enables innovation and competition, driving down explicit transaction costs and introducing new pools of liquidity. This is a very important point, because different market participants need different tools to achieve best execution.
UBS is a large global asset manager with a presence in 23 markets and I am responsible for the execution of some very large orders. Sending orders of this size to only an open order book would reduce liquidity and drive-up transaction costs. Firms dealing in large orders, like ours, require every available tool to access liquidity. Putting caps on those tools hurts our clients.
Where should EU policymakers focus to drive growth in the region?
That is a complex question. Broadly speaking, there are a lot of things which governments and regulators could do to drive growth, such as fostering more start-ups, improving market efficiency, and reducing the cost of raising capital. However, when a company makes the decision to go public, it has the ability to choose on which exchange it lists its stock. From my perspective as a trader, one of the key factors companies must consider is the robustness of the secondary market. When thinking about the secondary market, it’s important for policymakers to consider how to reduce the cost of trading, enable deep pools of liquidity, and encourage a larger investor base.
I would highlight three areas to focus on. First, a study on trading costs and liquidity, as well as the impact of past regulations. Second, I would also remove restrictions on instructional trading venues to enable traders to ensure best execution. Finally, there should be a focus on expanding the investor base. From a liquidity perspective, breaking barriers is key to the growth and development of the investor base. For example, most US retail investors are unable to buy and hold an EU stock in their retail brokerage account. So, while broadly there is a lot that could be done to drive growth, in my opinion, reducing costs and enabling a broader audience of market participants will increase the appeal of any exchange to companies looking to list.
Do you expect trader’s appetite for risk to go up this year, why and what impact will this have on trading patterns?
I don’t think that appetite is the problem. The problem is risk. In 2022, central banks took us on a wild interest rate ride. And it doesn’t take much to fill a risk profile when gilts trade on a higher volume than Bitcoin; when USD/JPY, which is typically a 4-5 vol currency, rallies 50%, and when developed market inflation prints in the double digits. Now that the VIX is back down at 20 and the US ten year is finding its range, the equity market can focus on earnings and figure out how to price stocks again. I am not saying we have seen the last of volatility, but I think the volatility this year is going to be driven by what equity investors understand best, which is earnings. Because of that, investors are going to have more confidence to take risk and market makers will be able to provide decent two-way liquidity.
How can regulators and participants work to reduce fragmentation in Europe?
While fragmentation can help drive competition and innovation, the industry needs to focus on stitching things together better and move towards to what I call a “distributed exchange”. By that, I do not specifically refer to Distributed Ledger Technology (DLT), although I think over time, it will make its way into the industry infrastructure. I am speaking instead about promoting a single best bid and offer across exchanges, venues and banks SIs, providing the transparency such that orders are traded at the best possible price for the lowest possible cost. That could be done through a European SIP and a EBBO (European Best Bid and Offer).