Combating liquidity challenges in Europe requires warning particularly when contemplating various technique of buying and selling

The creation of non-public rooms the place members can commerce bilaterally behind closed doorways and the affect this might have on liquidity was a key theme addressed at TradeTech Europe 2024, with panellists discussing whether or not such strategies will be thought of truthful and equitable.

James Baugh, TD Cowen

“We’re not speaking about multilateral buying and selling alternatives. Subsequently, it implies that there’s clearly going to be extra enterprise taken away from the general public markets,” mentioned James Baugh, managing director, head of European market construction at TD Cowen.  

“I wouldn’t essentially say {that a} non-public room can be dissimilar to possibly among the RFQ fashions that sure platforms function, the place you may have that bilateral relationship, which means that actually one platform has taken some retail enterprise out of the general public markets by offering that form of bilateral association between market maker and retail.” 

Baugh added that we’ve got to watch out we’re not self-harming when in search of liquidity alternatives in a troublesome market – highlighting, nonetheless, that whether or not it’s a non-public room, or one other liquidity alternative, one won’t flip them away if they will plug that liquidity hole.

“Finally, long term, what does this imply for our ecosystem? What does this imply for these worldwide buyers trying into Europe, considering, nicely, the place’s the liquidity? There’s nothing to be doing right here. That will be my private tackle it.”

Countering this viewpoint, Anish Puaar, head of European fairness market construction at Optiver, added: “Not all orders or all liquidity is appropriate for public markets, whether or not that’s lit, darkish, or periodic and also you do want these various technique of executing.

“It’s one thing we’ve got to be cautious of however we’ve got to watch out with not making an attempt to power every part onto public, lit or darkish markets as a result of we’ve seen earlier than from regulatory makes an attempt to do this, that doesn’t finish nicely.” 

Baugh added that fragmentation is nice, nonetheless including, “Let’s simply all be conscious if it swings too far a method and if there may be much less addressable liquidity, that’s going to trigger us long term injury.”

The difficult European liquidity panorama has, unsurprisingly, been central to a number of panel discussions on the convention all through this week. 

Panelists talking on Tuesday highlighted the significance of understanding what has led to present liquidity panorama points so as to create viable options.

“Everybody on this room is responsible for the liquidity drawback in Europe,” mentioned Rupert Fennelly, EU head of equities digital buying and selling and gross sales at Barclays.

Innovation – though sometimes related to ironing out the creases in markets – was highlighted by some panellists as detrimental to contributors in some circumstances, creating extra complexity for companies.

“All of us need to innovate and a few of that has unintended penalties,” mentioned Marc Wyatt, head of worldwide buying and selling at T. Rowe Value.

“Now we have to be very even handed with how we spend our time and the way we determine on our allocation. Sadly, in the event you gave a buy-side agency a big tech spend, 20% is happening regulatory compliance and the following 10-15% is happening conserving the lights on. Small and medium-sized outlets are going to battle. Now we have to be even handed with know-how and expertise in place.” 

With the widespread understanding and settlement that the European liquidity is struggling, panellists mentioned strategies wherein market contributors might help fight this.

“For us and particularly trying into the market construction, not solely in Europe and the US, I believe shortening up the market hours would go a great distance for serving to liquidity for us,” added Wyatt.

A number of panellists agreed {that a} shortening of the buying and selling day can be helpful to bettering liquidity situations, with a number of labelling it as one of many simpler options to this concern.

“Shortening buying and selling hours is unquestionably one that may be straightforward to attain if we didn’t have resistance from among the exchanges, as a result of that makes whole sense. There’s no motive why we take two hours longer to commerce a tenth of the quantity that trades within the US,” mentioned Fennelly.

“We discuss quite a bit about retail and retail involvement out there. How can we anticipate folks to again our market after we’re not prepared to again it ourselves? These belongings have to be freed as much as take part extra within the capital markets, take extra danger and likewise reap the advantages of it.”  

Tying up the potential options to the European market’s challenges with liquidity, Baugh concluded with a showstopping remaining quote: “Consolidated tape for me [could be beneficial], transparency is essential. I believe it’s an actual disgrace that one incumbent alternate has determined they don’t see worth in a pre-trade consolidated tape.”