Liquidnet at International TraderForum 2024

Gareth Exton | Head of Execution and Quantitative Services, EMEA

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What’s been happening

Politicians and regulators continue to try and revitalise European equity markets through regulation, particularly through changes to the MiFID II legislation, however, European markets remain fragmented and difficult to navigate.

Whether you feel it's because of these continual interventions, or despite these influences, the situation remains that activity in the market feels stagnant. On-exchange daily volumes have been stuck for the last few years at between €40 and €50bn of traded notional per day. For contrast, this is similar to the current daily notional traded in Nvidia!

Why it matters

Changing the direction of travel for European equity markets is going to be difficult, involving a range of complex changes as its clear that no silver bullet.

There will likely need to be interaction from governments when considering policies around investment, taxation and pensions. We have started to see this with the announcement of a UK ISA by the previous Conservative government in the UK and changes to the listing regime, first announced alongside a host of other proposed reforms, entitled The Edinburgh Reforms.

Regulatory changes to how the secondary markets function, currently being consulted on by ESMA, look to build on MiFID II. In particular, the consultation paper on Transparency and Stability is looking to revisit RTS 1, making changes to how Dark trading, SI’s and OTC markets operate. Whether these changes will help to simplify the market and create more liquidity remains to be seen.

The complex nature of the European markets is not helped by a lack of transparency in where and how a stock is being traded. One measure aimed at helping to solve this problem is the long-debated Consolidated Tape (CTP). ESMAs current consultation paper on ‘Enhancing Data & Removing Obstacles to CTP’ closed in December 2024 and once that is reported, we may move closer to a CTP tender process beginning. Debates continue on whether any CTP should be pre-trade or pre and post-trade. In addition, questions around revenue sharing and who and how a CTP would operate need to be answered before anyone really knows if a CTP will be beneficial to the market.

Questions you should ask during the panel

1. How will a CTP help generate more liquidity in the market

2. Do governments have a bigger role to play to promote investing in stocks?

3. How can Europe create a better thriving retail investment culture and market

4. Does anyone think re-bundling research and execution is sensible given the many benefits of unbundling?

Patric Okumi | Principal Liquidity Solutions

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What’s been happening

Let’s set the scene. ETF Assets Under Management (AUM) reached $11.5tn at the end of 2023, having grown at a compound annual growth rate of 25% from 2022.

Fast forward to the end of May 2024 and AUM had grown to $12.4tn, with 78% being held in Equity ETFs and 18% in Bond ETFs. In short, the growth in ETFs continues and shows no signs of abating. A driver of this growth continues to be the increase in popularity of retail trading platforms and the rise of actively managed ETFs, including Smart Beta & Thematic ETFs.

In secondary trading, average daily volume (ADV) in the first quarter across European listed ETFs stood at $11.3bn, up from $10.3bn in the fourth quarter of  2023. Driving this growth has been a preference towards Equity ETFs, making up 62% of ADV, with Fixed Income ETFs picking up steam.

Why it matters

The flexibility of ETF instruments is envisaged to continue attracting new investors across retail and institutional participants. Whilst ETFs share many of the characteristics of ordinary shares and traditional equities, under the hood are considerable differences which, in turn, create a divergence in trading mechanisms, benchmarks and protocols away from their traditional equity cousins. 

Across protocols, RFQ remains the dominant mechanism commanding over 50% of ADV. LIT protocols typically range from 25-30%. However, as the market structure evolves, a contentious scuffle is building up with a number of participant groups, including algo-providing investment banks and exchanges, striving to increase on-exchange activity to challenge the dominance of RFQ-optimised electronic liquidity providers. 

Further complicating ETF trading is the stark difference in liquidity between European and US exchanges. For investors new to ETFs, a necessary educational journey must be undertaken to develop fluency. There is also an exciting new influx of electronic trading protocols gaining dominance including automated RFQ protocols introducing further execution efficiencies.

Questions you should ask during the panel

1. How do you determine which execution protocol is best for your workflows?

2. How do you measure best execution on ETF trading?

3. What is the best way to execute ETF baskets?

Jeffrey O'Connor | Head of Market Structure, Americas

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What’s been happening

In December of 2022, the SEC released four proposals aimed at reshaping U.S. equity market structure. Despite a hurried comment period at the end of March 2023, there has been little movement or further updates on the bulk of the initiatives.  Among the proposed reforms, the least controversial — Execution Transparency Disclosure — saw adopted final rule amendments tied to rule 605 mandated disclosure.

 The more controversial proposals, such as Enhanced Order Competition, Tick Size and Access Fees, and Best Execution, have suffered through an eerie quiet. The most contentious is the Enhanced Order Competition proposal, which would involve exposing retail trade orders to new auction instruments on exchanges. This rule has had the least likely chance of adoption from the start, and consensus suggests that this proposal will not move forward. However, the looming U.S. Presidential election is creating a stopwatch on other components, namely Tick Size and Access Fees.

Why it matters

The politicized nature of the SEC, particularly its five-member committee which always carries the voting majority of the residing president, makes the November election an important inflection point. The stakes are so high that many anticipate the SEC will attempt to push forward key pieces of this reform prior to the election. 

As mentioned, the comment period was condensed but also fruitful, with comments and analysis coming from all industry avenues and, even drawing consensus between typically opposed parties like wholesale market makers and exchanges on the ways to move forward. While the tick size limits the ability of exchanges to compete against wholesalers who can execute in 1/100 penny increments, along with access fees, it allows wholesale market makers to make their business profitable — a business that led to free retail trading, along with full access to 10,000+ stocks or ETF’s with immediate execution, and at prices typically reserved for institutions. 

The proposed reforms, however, could reduce market maker participation which would, in turn, upset the current structure retail traders enjoy, triggering strong opposition from that sector. However, a more measured approach of implementing a test to a subset of tick-constrained (highly liquid) stocks, at a compromised rate of half a cent, has received enough industry attention to suggest a move in that direction. 

As mentioned, access fee reduction can hurt market maker margins by effectively lowering the fee exchanges receive from matching orders at auction, to levels below the payment wholesalers make to brokerages in exchange for execution of their retail volume. Again, disruption here threatens to hurt retail participants and the unfettered access to markets that is currently enjoyed.  Nevertheless, the industry has voiced acceptance of a test of the tick-constrained subset and moving an access fee cap to 15mils from 30mils, proportional to a potential reduction in minimum quoting increment. 

Questions you should ask during the panel

1. The tick size can have harsh consequences for large institutional money managers trying to move large blocks of stocks as the quote becomes more fragmented.  If finding real liquidity at a price point becomes more difficult, how do you expect your broker/dealer to adapt

2. The spirit of the proposals is to enhance competition. But forcing the hand of industry participants to adopt a system that prevents market forces from determining the cost of executing a trade can be argued as anti-competitive.  Do you feel U.S. markets are efficient enough as is? And can this be considered regulatory overreach?

3. In general, are you supportive of the SEC’s Market Structure Overhaul Proposal?

   
   

Photis Kassianides | Portfolio Trading - Sales

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What’s been happening

The financial landscape of the Middle East and North Africa (MENA) region is undergoing a significant transformation, driven by efforts to diversify economies away from oil dependency, improve regulatory frameworks, and capitalize on a booming IPO market. This shift is positioning the region as a growing hub for capital market activities.    

As MENA economies pivot away from oil, the development of a robust financial market has become central to attracting investment and creating sustainable growth. The surge in IPOs across the region reflects this trend. In the second quarter of 2024, 13 IPOs raised a total of $2.6bn in across the Gulf Cooperation Council  (GCC), compared to 13 IPOs in Q2 2023 that raised $1.8bn. Saudi Arabia, which accounted for 61% of the total GCC IPO proceeds, continues to lead the charge 1. 

Regulatory reforms aimed at modernizing and opening the region's capital markets have been crucial to this evolution. These reforms, which focus on enhancing transparency, improving governance and making it easier for foreign investors to participate are creating a more attractive environment for international capital. Simultaneously, the rise of digital platforms and fintechs in the region is also transforming capital markets, making trading more accessible and efficient.

Why it matters

The growth of MENA capital markets represents a pivotal step toward economic diversification, bringing with it new investment opportunities, fostering regional development, enhancing geopolitical influence, facilitating global economic integration and driving financial innovation.

By developing robust financial markets, MENA countries are creating new sources of economic growth, reducing their vulnerability to oil price fluctuations, and ultimately promoting greater stability. This opens up new investment opportunities for both regional and international investors. As more companies in the region go public, investors gain access to a wider range of assets, including fast-growing sectors such as technology, real estate and renewable energy. Since 2022, there has been an accumulated $17,600m worth of IPOs in the Energy, Utilities and Resources sector amongst the GCC2.

This development is also bolstering the geopolitical influence of Gulf countries. As these nations become key players in global finance, they are gaining more leverage in international economic discussions and can attract partnerships and investments from global powers. Their enhanced role in the financial landscape extends their influence beyond the region, cementing their importance on the world stage.

Moreover, as the MENA markets continue to grow and mature, they are becoming more integrated into the global financial system, facilitating greater cross-border capital flows. This deeper integration not only increases the region’s relevance but also contributes to the health of the global economy by promoting more fluid international investment channels.

Finally, the adoption of digital trading platforms, fintech, and other financial innovations is modernizing the financial infrastructure, and several regulatory authorities across the Gulf have established sandbox initiatives to foster this innovation making the region a leader in certain aspects of financial technology. Programs such as DIFC FinTech Hive, the ADGM RegLab and the SAMA regulatory sandbox are helping fintech companies to test and develop cutting-edge technologies in a controlled environment3.

In this dynamic environment, the growth of MENA capital markets is not just a regional phenomenon but a development with far-reaching implications for the global financial system.

Questions you should ask during the panel

1. How sustainable is the current growth in MENA capital markets

2. What role do foreign investors play in MENA capital markets?

3. What are the risks associated with the rapid growth of these capital markets?

4. What impact could geopolitical tensions in the region have on the sustainability of capital market growth?