According BMLL Technologies data, bilateral trading accounted for 35% of overall notional traded as of November 2024, including request for quote (RFQ), off-book on-exchange, over the counter (OTC) and SI volumes both above and below the large in scale (LiS) threshold. This marks a 12% increase since January 2021.

Defining what falls into the bilateral sphere is important. Regulators in the last few months have been attempting to clean up reporting flags in a bid to offer greater transparency to participants looking to better understand the landscape.

One of the most notable bilateral growth stories, however, is that of the off-book on-exchange segment. This umbrella term again accounts for a whole host of things including retail flow and high touch agency crosses. Cboe and Aquis’ new VWAP offerings will also print their flow as off-book on-exchange for example.

Central to the growth of the off-book segment and perhaps responsible for ruffling the most feathers is a relatively new workflow whereby non-bank liquidity providers quote directly to the buy-side via their execution management systems (EMS) leveraging actionable indications of interest (IOIs). It’s this new growth among other areas that has attracted notable attention from the industry and sparked new offerings from the more traditional players looking to preserve their market share.

The benefits of streamlined buy-side workflows are clear: offering better price improvement, reduced market impact and time to market and greater flexibility around liquidity access. What’s more, with volumes on the lit market continuing to decline, one can hardly blame traders for exploring alternatives to traditional workflows.

That being said, the bilateral segment is becoming increasingly meaningful with both alternative and now traditional players exploring new workflows, and some participants are now beginning to question whether such a level of bilateral trading exists that could be detrimental to the market’s long term health. Some participants have even begun suggesting that the European equities market could find itself on track to adopting an almost completely off-exchange foreign exchange model in the next few years if it continues on its current path. However, this eventuality is highly unlikely. Said bilateral workflows rely heavily on a reference price from the lit markets. Ironically, the thing that stands to be damaged if too many volumes move off-exchange.

For buy-side traders, the appeal of executing without going out to market is – understandably – hard to resist, but the question as to whose job it is to now moderate the level of bilateral liquidity in the market is now somewhat continuously being asked.

“I can understand the appeal to a buy-side trader thinking ‘I can clear my entire blotter with one click of a button so why don’t I do that and not have to worry about direct market impact?’,” explains T. Rowe Price’s equity trader and market structure analyst, Evan Canwell.

“There’s definitely a place for bilateral liquidity, but it’s incumbent on us as the buy-side to understand what we’re interacting with and think about the balance. It’s like fast food, it might feel good in the short term but there could be unintended consequences for the longer term health of the trading ecosystem.”

Non-bank providers

One of the most spoken about names in this context is, of course, Optiver. While the firm is not solely responsible for the growth of off-book on-exchange, the market maker’s model of connecting directly to the buy-side via EMS has taken the market by a storm. The firm’s model is risk filling but without acting as a systematic internaliser (SI).

“It [bilateral trading for blocks] never really took off as a product whereas the way I look at the more recent developments in bilateral liquidity, it’s for a lower liquidity demand which does feel more sustainable,” says Legal & General Investment Management’s global head of trading, Ed Wicks.

While historical bilateral connections with other alternative providers – namely XTX Markets – have historically been more focused on smaller flow, Optiver’s model offers the opportunity to trade blocks of 5-20% of average daily volume (ADV), The TRADE understands. And it’s this element that has piqued buy-side interest. It’s easy ‘fill or kill’ model means traders don’t have to go out to market in order to execute, simplifying workflows and reducing market impact.

“The liquidity provision workflow can be a useful tool, especially given the recent record lows of lit liquidity. If you can get done and risk filled, there’s an efficiency to that,” says Hayley McDowell, EU equity electronic sales trader and EU market structure Consultant at RBC Capital Markets.

It’s this efficiency that has seen the buy-side continue to use this model of trading to execute flow. According to BMLL Technologies data, as of November 2024, off-book on-exchange constituted 58% of all bilateral trading activity – around €376bn – evidencing how attractive this model is to firms in comparison with multilateral venues and platforms in the lit markets.

“If I see a workflow solution that is potentially saving costs for funds and ultimately delivering good outcomes for clients then we have to evaluate it,” adds Wicks.

“For us, it’s [bilateral] more of an efficiency workflow tool for the lower liquidity demand orders or baskets we have. We consume the feed into our EMS so when an order hits our desk we can see straight away whether the whole order can be fulfilled by the bilateral liquidity. Not having to declare anything is an asymmetric benefit to us because we can see whether that liquidity can be fully filled on a fill or kill basis.

“If we were to go into the secondary markets utilising a liquidity seeking algorithm that would have a cost relative to trading at midpoint on the bilateral feed. For a subset of our flow from a cost perspective and an efficiency perspective it makes a lot of sense to us to utilise that bilateral liquidity.”

In light of the growing bilateral sphere, agency brokers such as BTIG and Redburn Atlantic have also been busy launching services that aggregate and streamline liquidity from alternative and electronic liquidity providers (ELPs) and connect the buy-side with them via an EMS or via a custom algorithmic strategy, all with the aim of easing the strain on the buy-side by channelling liquidity to them via one location.

“Traditional liquidity aggregation is not an option when trading bilaterally, but connecting clients to multiple competing quotes – on a fill-or-kill basis – via a single access point saves them time, limits selection bias and increases overall hit rates,” head of trading and algorithmic solutions at Redburn Atlantic, Phil Risley, tells The TRADE.

“The challenge in optimising the approach to principal liquidity, is to balance the ELP’s need to understand the profile of the flow with which they interact and the requirement to minimise information leakage.

“Ultimately, the goal is to create a virtuous cycle, with high quality flow incentivising larger and more consistent quotes – aligning interests and ensuring everyone wins.”

Redburn’s offering claims to tackle issues around market impact by operating under a fill or kill basis. Each client order is matched immediately in its entirety with a single ELP or not at all. It is directly available to the buy-side with qualifying flow via their EMS as a custom algo strategy. A spokesperson confirmed that the firm is speaking with all of the major non-bank SIs regarding onboarding. The ELP liquidity is not aggregated but available from a single point of access.

BTIG’s offering currently takes in live streams from three ELPs. Based on client preferences, it streams the best quote into the buy-side client’s EMS. A source has confirmed that the number of provider partners used by BTIG is growing.

Said quote can be anything from mid to far point liquidity in different shapes. If the client wants to interact they click to instantly execute or use OMS automation. The client then faces BTIG for settlement so there is no additional onboarding required.

The client has the choice whether to remain anonymous or allow ELP to profile them which may result in tighter pricing. This offering is also available via BTIG algos which for some buy-side clients may fit workflow better with wheels.

Traditional banks strike back

Given the growth of market share seen by these alternatives, the market has also seen a wave of new interest in this area by the traditional banks as they look to maintain their market share and retain commissions.

Major sell-side have offered systematic bilateral liquidity for years now but the practice hasn’t seen mainstream adoption for several reasons. Historically connecting bilaterally to a CRB for example has always been seen as a bit of a blind play as you don’t necessarily know what else is in there. The services for blocks have typically also only been on an ad hoc basis for banks’ larger clients.

“The evolution of IOIs being sent directly to client EMS’ is a net positive and opens up further trading opportunities and importantly enhances workflows, particularly when offered alongside a robust TCA process to help manage the challenges of longer term parent level impact,” explains Goldman Sachs’ managing director and head EMEA electronic and program trading, Alex Harman.

“This year we have been working with the major EMS’ to utilise actionables to deliver liquidity in several products; blocks, IS and close benchmarks. Expect to see a lot more from us here in the future.

“Our systematic GMOC product was the first of its kind and remains a heavily used product as part of our close benchmark offering. More recently we launched our DTC Stealth product, which is a tactic within our SOR that leverages dedicated liquidity from our systemic internaliser, plus other non-displayed liquidity with the aim to fully fill parent orders.”

With alternative players now targeting larger flow, major sell-side are looking to create their own direct connections via EMS providers in order to compete in a second wave of the bilateral evolution.

“I know several [big banks] are building aggregators and liquidity workflows that try and mimic some of the bilateral features. Whether we see a pure bilateral product from the investment bank similar to what we see from the alternatives I still don’t know if that will be the case,” adds Wicks.

“More traditional liquidity providers like the investment banks are now looking at it with some degree of urgency to try and insert themselves into that workflow. I don’t know how many more [bilateral offerings] we would need frankly but we will look at them when they come.”

Fast food?

With both electronic and alternative players cementing their workflows and major sell-side looking to follow suit, the bilateral segment is becoming extremely meaningful for both the buy-side and the wider market. And this meaningfulness is what’s raising some eyebrows. With the proposition now irresistibly attractive to the buy-side, the longer term impacts are now being assessed.

“The issue comes if too much of your flow goes that way,” says McDowell. “It can also impact on-venue liquidity. If has a trader has a large order on the pad, they might go to an ELP first, then maybe an SI, before going to the order book last.”

Given the existing decline of lit, this natural evolution – and it is a natural evolution – has the potential to become a bit of a self-fulling prophecy as spreads and toxicity increase in the lit market.

“Most buy-side firms and a lot of market participants would recognise that it’s in most people’s interests to make sure that lit markets remain a functioning viable part of the market,” concurs Wicks.

Traditional sell-side bring with them whole swathes of other auxiliary services that are bundled with their services across settlement, payments and research to name a few. Electronic and alternative liquidity providers do not provide these extensively and their services are usually limited to the execution side of things.

“Longer term, if we end up with a large part of the market trading bilaterally then we may start seeing impacts elsewhere – for example, will traditional brokers start reducing resources in other areas to focus more on liquidity provision?” Asks Canwell. “Will we see reduced price formation and greater toxicity on-exchange if smaller orders end up in bilateral mechanisms?”

The role of the regulator

The question now being asked by many is: what is the role of the regulator? Some participants are asking whether it is fair that some market makers should be able to risk fill clients without operating as an SI and the associated pre-trade transparency.

Ultimately, given this is the natural evolution of where the market is heading, it’s hard to see an eventuality where regulators would step in to prevent it. Famously, regulators tried to tackle decreasing exchange traded volumes with caps on dark trading in Europe during the Mifid II Review and the multi-year tug-of-war esque saga that achieved an arbitrary result of deleting the 4% and 8% double volume caps (DVCs) in favour of a single cap of 7% has largely been criticised as a waste of time.

“If they [regulators] think too much is being done off-exchange and there’s not enough price formation on-exchange, potentially I could see them stepping in,” says Canwell. “One area where there might be more regulatory scrutiny is around the closing auction because there’s a lot more being done off the primary closing auction in recent years.”

One area regulators should and are looking to change is around transparency. Reporting flags were one such area that was focused on by both UK and European regulators in April in order to simplify the regime and try to understand a bit better where volumes are being executed within the market. The concept of what is addressable and what is not is something now being explored by participants and regulators and could result in further probing from watchdogs.

“Reporting changes had a profound impact on the liquidity landscape. It was confusing before and a lot of the flags didn’t necessarily make sense. There was a lot of repetition and noise,” says McDowell. “Traders are looking for more transparency in the off-book space. Some participants are using “off-book” as a means of printing activity, but peers and clients are unclear about exactly what off-book on-exchange is.”

All roads lead back to the consolidated tape. And there is, of course, the likelihood that we will have a consolidated data source in the next decade (fingers crossed). This will also bring with it extensive transparency that will help both participants and regulators alike to better understand and interpret the market picture around percentages of liquidity accounted for by different segments. Given how participants and regulators alike are turning their attention to the addressability of flow, it may even be a worthwhile venture to do an independent analysis of how stable pricing is in Europe.  

“The market structure needs to respond to this change in dynamics and central to this is the delivery of a consolidated tape in both the UK and EU so all market participants can understand what liquidity is available where,” said Eleanor Beasley, EMEA equities COO and head of market structure at Goldman Sachs. “Understanding the different mechanisms leveraged to deploy bilateral liquidity is important as is understanding where this volume is printing.”

The growth of various different trading workflows that fall under the bilateral umbrella is undeniable and certainly something that participants and regulators alike should be keeping tabs on. Whether or not it’s something watchdogs should intervene with is another matter. Bilateral liquidity only works to a certain size. There will always be a portion of the market that requires public markets and going out to find the other side.

The market’s natural evolution is what it is. If these providers are offering buy-side traders an attractive service, who’s to say it is wrong or right? Perhaps as Canwell noted earlier the onus is on the buy-side to steer the market in the “right” direction.

However, when an order hits the pad, it’s rare for a trader to sit back and think about the wider long term market implications instead of whether a workflow will achieve the desired best outcome for their trades and subsequently their clients. On the current trajectory, our markets are likely set to look fairly different in the next five years. Whether that’s wrong is one for the philosophers that walk among us.

The post Liquidity, it’s a two-way street appeared first on The TRADE.

RBC Capital Markets appointed Mitul Patel director, central bank sales, based in London. As part of the role, Patel will hold responsibility for distributing global rates product, alongside collaborating closely with global trading teams, internal partners in DCM, syndicate, and sales to execute strategy and drive growth. Patel brings more than 20 years’ industry experience to the role, primarily across rates and FX. He joins from HSBC, where he most recently he held responsibility for primary coverage on G10 rates for reserve managers and UK real money clients.

Fidelity Investments appointed Sarah Lambert senior trader, based in Boston. Lambert joins Fidelity from MFS Investment Management where she spent the last five years, most recently serving as investment officer, fixed income trader. Before joining MFS, she spent seven and a half years at BNY Mellon (now BNY). Initially during her tenure at BNY Mellon, she served as an assistant portfolio manager, fixed income. Following this, Lambert was promoted to portfolio manager, fixed income for just over five years.

Australian pension fund AustralianSuper selected one of its own to take up the reins for its dealing business. According to an update on her social media, Nina Marsh has been appointed manager of dealing at the buy-side firm after spending the last two years as a senior dealer at the firm. Prior to joining AustralianSuper – and the buy-side for the first time – in 2022, Marsh spent 14 years at Liberum as an equity sales trader and nearly nine years at Deutsche Bank in the same role.

Hong Kong Exchange and Clearing (HKEX) appointed Vicky Chan managing director, head of post-trade, effective 5 August. Chan returns to HKEX after previously serving for 15 years at the group in a range of teams including cash settlement, clearing operation and platform development. Previously in her career, Chan held roles at various companies including AIA Group, Goldman Sachs, UBS and PricewaterhouseCoopers. As part of the new role, Chan will be responsible for leading the post-trade team to further elevate HKEX’s service offering across its clearing and settlement systems, the firm confirmed.

The post People Moves Monday: State Street Global Advisors, RBC Capital Markets, Fidelity Investments and more… appeared first on The TRADE.

As part of the role, Patel will hold responsibility for distributing global rates product, alongside collaborating closely with global trading teams, internal partners in DCM, syndicate, and sales to execute strategy and drive growth.

In addition, Patel will support the execution of RBC’s global distribution strategy and coverage model for the central bank and sovereign wealth fund client base.

He will report to Kofi Oteng, European head of flow rates sales, The TRADE understands.

“Mitul’s appointment and the expansion of RBC’s central bank coverage model demonstrates an ongoing commitment to driving growth and increased relevance with international investors in global markets flow product,” said RBC in a memo.

Read more: Fireside Friday with… RBC’s James Hilton

Patel brings more than 20 years’ industry experience to the role, primarily across rates and FX.

He joins from HSBC, where he most recently he held responsibility for primary coverage on G10 rates for reserve managers and UK real money clients.

Patel appointment follows Elsa Lignos’ expanded role as global head of central bank coverage – global markets, in addition to global head of FX strategy and head of European institutional FX sales and futures, last year.

The post RBC Capital Markets taps HSBC for new director of central bank sales appeared first on The TRADE.

Algo trading is very well established and we’ve had this catalyst of Mifid II, which effectively means that more and more flow is now directed based on performance, particularly via performance weighted algo wheels. The biggest ask that we get when we’re pitching with clients is to present a differentiated approach. The idea of selecting a pool of homogeneous algorithms just isn’t going to result in performance improvements over time.

The challenge is coming up with new ideas which are potentially going to result in outperformance. You’ve got a lot of brokers delivering very similar VWAP strategies, but if they’re broadly built in the same way, you’re not going to learn from that. RBC built an AI Research Institute called Borealis AI, nearly a decade ago. It serves the entire RBC group. We’ve been a key beneficiary of that and we’ve used that expertise to build a segregated algo platform called Aiden. We’ve been running that in North America for over four years and we launched in Europe at the back end of last year.

We go through periods of different types of algos being more or less popular depending on the different challenges or the different trading environments. Broadly, we find VWAP strategies and close strategies being commonly used by the index or quant firms who often will be trading baskets of orders. There’s a huge focus on the closing auction, giving the amount of volume that’s now trading there. From a single stock trading perspective, there’s an enormous amount of fragmentation in the market now. Not just in terms of number of venues, but also the different types of liquidity. Whether it’s SIs, periodic auctions, and lots of OTC liquidity now.

Clients are starting to use liquidity seeking algos a lot more than traditional POV algos because they deem them to be more intelligent. The quant hedge funds will either be using DMA and running their own strategies or basket based algorithms. But single stock investors, where they’re literally trading a single stock at a time, they’ll be looking for something much more liquidity focused.

How is buy-side demand for multi-asset capabilities changing and what is driving this?

More than anything clients are looking for choice. In the equity world, we’ve traditionally had different execution desks – high touch, low touch, portfolio trading – clients are starting to look at that and want to see those same choices across the different asset classes. We’re seeing more and more of our clients working on multi-asset desks.

There’s an element of resource constraints. Firms are looking to do more with less. There’s an element of wanting to learn from the different asset classes and optimise what you’re doing versus best in class across these different asset classes. There’s lots of different examples of that across FX and futures. The latest is probably the ETF marketplace.

ETFs have traditionally been a big RFQ market and it hasn’t really been disrupted for a long time, but more recently, we’re starting to see lots of new ideas around how to change that marketplace. From the buy-side perspective, there’s more and more firms looking to launch ETFs and not just passive but active fund managers as well. There’s a drive to build a more transparent marketplace where they believe that asset class can thrive. Specifically, we’re partnering with a number of firms to build algos that encourage more liquidity onto lit markets, whereas traditionally it’s been RFQ or OTC.

How do you expect buy-side demand for artificial intelligence to develop in the coming years?

Lots of clients are learning about how AI can help them in their own businesses. The evolution of generative AI is incredibly exciting and the scope to adopt these technologies to drive efficiencies and improve service across all sorts of things within financial services is huge. Anything which is repetitive and not really adding too much value, AI can be massively helpful. At the same time, and it has been discussed many times at conferences, we have to make sure that we’re delivering these things in a responsible and ethical way and that you’ve got really strong governance around implementation.

I suspect that AI is very well adopted amongst a relatively small number of our hedge fund clients already. I suspect there’s plenty of clients out there who are already reaping the benefits of this type of technology. But there’s an enormous number of clients that are still trying to understand what the potential is and where exactly they can use it, how they can use it, and what the governance structures are going to have to look like internally etc. Over the next five years, there’s no question that people are going to be forced to take note and figure out how they can use this technology in order to stay competitive.

The post Fireside Friday with… RBC’s James Hilton appeared first on The TRADE.

RBC BlueBay Asset Management’s investment-grade credit trader, Christopher Lemmo, has left the firm to join Norges Bank Investment Management after almost 13 years at the fixed income focused asset manager. He has been appointed senior trader at Norges Bank Investment Management, based in New York. Lemmo joined RBC as an investment-grade credit trader in 2010 after previously spending nearly four and a half years at Vanguard in its analyst development programme and later as an investment-grade credit trader. Joining the US-based RBC BlueBay desk following Lemmo’s departure is Ben Romeo, who has been appointed senior trader after most recently serving at AXA Investment Managers for a decade.

Aviva’s global asset management business has appointed Jill Barber as global head of distribution, who is expected to join the firm later this year subject to regulatory approval. Barber will join Aviva Investors from GAM Investments, where she has served as global head of institutional solutions since November 2020. She brings 25 years’ experience in investment management to the firm, having held senior positions at Jupiter Asset Management, Franklin Templeton Investments, Hermes Fund Management and Fidelity International. Barber will succeed Louisa Kay, who is set to retire at the end of this year following three decades in the investment industry. Kay will continue to lead the distribution function until Barber joins the firm. 

The post People Moves Monday: Musical chairs appeared first on The TRADE.

Heraty is set to take on the role of head of US equity solutions and structured product sales, whilst Gleave has been appointed as head of European equity solutions.

Heraty was previously at Credit Suisse where he spent four years as head of North American equity derivative sales. Before that, he worked at Bank of America for 11 years, most recently as head of North American equity client solutions sales and structuring.

In this new role, he will be based in New York and focus on growing RBC’s equity structured product and Quantitative Investment Strategies (QIS) business with both institutional and private bank clients.

Heraty will report to Sian Hurrell, head of global sales and relationship management and global markets Europe.

Prior to this move, London-based Gleave was head of equity solutions for EMEA at Nomura and has also previously held senior positions at investment banks Morgan Stanley Bank of America, and Lehman Brothers.

As head of European equity solutions, he is set to expand RBC’s North American corporate equity derivative (CED) offering across Europe and work on increasing cross-border connectivity with North America for its European clients.

As part of this push for greater cross-border collaboration, Gleave will report to both Jason Goss, head of European solutions and structured product sales, and Graeme Bath, global head of corporate equity derivatives.

He will partner with several private side teams, such as: European solutions, equity capital markets and global investment banking, according to the internal memo.

Earlier this month, The TRADE reported that RBC’s co-head of European electronic sales and trading, Bianca Gould, was set to leave the bank after almost three years as part of streamlining measures across the electronic trading business.

The post RBC grows equities workforce with two new managing directors appeared first on The TRADE.

Former head of platform sales at Citi, Matt Cousens, joined execution algorithm provider BestEx Research as its head of EMEA equities. In his new role, Cousens will be responsible for driving the rollout of BestEx Research’s equities execution algorithms for US and Canadian trading to the European customer base as well as their general globalisation. He joined the firm after most recently serving at Citi for two and a half years, responsible for distribution and sales across its cash equities platform. Previously in his career he spent a year and a half at Barclays bank as co-head of electronic trading and head of EMEA equities execution sales and 12 years at Credit Suisse as its co-head of advanced execution services (AES) sales for Europe.

Merchant bank Panmure Gordon selected a former Winterflood Securities individual as its next head of trading. James Perry joined Panmure Gordon as head of trading after spending the best part of 19 years at Winterflood as its head of small cap trading, according to an update on his social media.

The post People Moves Monday: A series of senior appointments appeared first on The TRADE.

Liber joins RBC Capital Markets after a non-compete period of one year.

Prior to that, Liber spent nearly five and a half years at Optiver, most recently serving in a derivatives sales position, based in the Amsterdam.

Before Optiver, Liber spent a year and a half at Deutsche Bank in a London-based equity derivatives sales role.

Earlier in his career, Liber held an equity derivatives and index structuring position at Société Générale as well as a fund derivatives and index structuring role at Exane.

“I am pleased to welcome Charles to RBC. He is based in Paris and is part of our strategic investment in the Continent across France, Germany and Switzerland,” said Paul Adams, head of cash equity & flow derivatives.  

“The expertise he brings to the business will help us build on our commitment to grow and expand our European Flow Derivatives client footprint, revenue and market share with our continental client partners.”

The post RBC Capital Markets names new Continental Europe head of equity derivatives flow sales appeared first on The TRADE.

Would you consider the recent Mifid compromise that was approved a success?

It has been a busy couple of years in terms of market structure and regulatory developments, and it is a complex environment for everyone to navigate. We can expect this to continue in 2023 as both the UK and EU continue to solidify their positions on Mifid. It will be interesting to see how the UK’s approach unfolds further this year and how it will differ from the EU. It is very likely that regulatory divergence between the UK and EU will come to pass, at least to some extent. We have already seen this in the rules around dark trading.

There is also the question of the timeline – will the UK implement changes more quickly than Europe? We know that divergence between the UK and EU on regulation isn’t something that market participants particularly want, but I think everyone is looking forward to a period of more certainty and stability that will enable us to adapt, evolve and continue to innovate on behalf of our clients.

Which areas have proved contentious with participants?

Reaching a consensus on any rule changes is always going to be a more complicated process within the EU, due to the number of stakeholders – and the agreed compromise could change as negotiations within the EU progress. As an industry, we can only hope that compromise does not impact market structure to the detriment of investors and clients.

The consolidated tape is arguably the most contentious area, but it is encouraging to see progress on establishing a tape after years and years of discussion on this subject. Another positive is the inclusion of best bid and offer ‘snapshot’ data, which could open the door to the inclusion of pre-trade data later down the line. Hopefully, the European Parliament will adopt a more ambitious stance (ideally a tape which is real-time and includes both pre- and post-trade data) and grasp the opportunity that the tape presents to grow European secondary markets with both hands.

What is driving the change of heart around systematic internalisers and dark trading?

Brexit has been one of the key drivers. The UK has been clear in the absence of equivalence that its focus is to become more competitive globally. Removing some of the restrictions on certain types of trading or liquidity under Mifid has been central to this strategy so far. Unsurprisingly the EU is watching the UK very closely and vice versa during this process, which is a positive.

There is a risk that some of the proposed restrictions in Europe, for example the minimum thresholds on midpoint trading on dark order books and SIs, which I would note is at odds with global practices, will put EU markets at a competitive disadvantage globally. In the long-term, the consequence could be a shift in liquidity from Europe to other markets, like the UK, where things will be less restrictive.

Dark books and SIs are a vital part of the liquidity landscape – any measurements to restrict certain liquidity pools should be backed by empirical evidence and analysis to avoid any potential unintended consequences.

The European Council’s proposed removal of limits on SIs and the 4% cap at the venue level on dark trading (in favour of a 10% market-wide cap) is, however, a positive step towards reducing some of the complexity that Mifid II introduced in 2018. Simplifying the regulatory regime for market participants and driving growth across European capital markets must remain the key focus of the Review.

Will these collective changes within the compromise reduce or reinforce fragmentation in Europe?

The Mifid regime created the fragmented market structure in Europe and that has increased complexity for market participants. The outcome of the Review will hopefully tackle at least some of those issues.

Fragmentation is not always a bad thing though. It drives competition, innovation and choice of execution for investors, which is crucial in the quest for best execution. Mifid II sparked the development and growth of things like algo wheels, periodic auctions, conditional venues – all of which are now a fundamental part of the liquidity landscape and the trader’s toolkit.

How do you expect this compromise to evolve throughout the regulatory process this year?

It is really difficult to make predictions on where we will end up at this stage, but there are several other market structure topics that I think will come more into focus for market participants this year. For example, solving the challenges around market outages and the increasing costs of market data, are now key topics of discussion with clients.

Reducing the settlement cycle will also likely become a more global focus. The US, Canada and other markets are migrating in the next couple of years and the UK is examining a migration with a newly-established taskforce. The impact that could have on firms in Europe will be significant. One thing’s for sure, it will be another eventful period for market structure developments!

The post Fireside Friday… with RBC’s Hayley McDowell appeared first on The TRADE.

The early signs are positive: A real-time pre and post-trade consolidated tape for equities has already gained strong support across key EU institutions, and is something we at Cboe have long advocated for to help drive investment and improve the resilience of markets. In the area of equity transparency, the bloc has a choice: Pursue an approach, supported by incumbent EU exchanges, of forcing market participants into low latency central limit order books, in the naïve belief that this will enhance institutional investor outcomes; or realise that the best way to attract investors to Europe is by catering their diverse needs and offering different trading mechanisms for price and size discovery.

The UK is embracing the latter approach, and we are hopeful EU policymakers will follow suit to restore its competitiveness and promote open, competitive and pan-European markets, which ultimately benefit end investors. Elsewhere, we believe brokers will continue to migrate their passive, displayed liquidity to pan-European venues that offer higher execution certainty and lower costs, as well as to alternative mechanisms such as pre-trade transparent Frequent Batch Auctions that help minimise price slippage.

Improved transparency is elusive – why? Trade reporting remains fragmented, not standardised and APA data is difficult to access. But hope exists! Amendments to MiFID II in 2021 lifted the technical and commercial impediments to a CTP emerging. The glass is starting to look half full.

Dissenting voices remain from those seeking to protect entrenched positions. Those in support of the CT need to up their efforts to present the benefits. Peering into 2024, I predict the CT will encourage growth in market participation, reduced market data costs and improvements in data products: liquidity analytics, TCA, pricing engines and portfolio valuations.

In 2023 [I predict] we will see political agreement on the legislative framework affecting market transparency. Q3 will mark the start of The CT tender process and by year end a CTP will be appointed. The CT will be one run as a market utility not as a data monopoly.  Surely, this is the fairest way? 

“The best way to predict your future is to create it,” Abraham Lincoln.

Adam Conn, head of trading at Baillie Gifford: T+1 settlement – coming to a market near you? Assuming the US and Canada go live in 2024, I imagine the full impact of mismatched settlement dates; funding costs and the ability to trade settlement FX become more apparent to market participants. Will the UK and EU follow suit? I don’t want to spoil the surprise. 

Matt Short, equity trading desk manager, BNY Mellon Pershing: Regulatory reform of global capital markets will continue to influence the trading landscape in 2023 and beyond. Cost transparency and payments for order flow (PFOF) is a growing focus for regulators around the world but differing opinions on dark pools and alternative trading systems is creating divergence that will ultimately lead to increased market fragmentation in the year ahead.

Market data pricing is another priority for regulators, but standardising data across jurisdictions requires consensus from regulators, exchanges, SROs, broker-dealers and third parties – a highly complex undertaking and a process that will result in a lack of harmonisation between markets (e.g., UK and EU) as they build out their own agendas for capital markets growth. This increasingly complex, and in some cases fragmented, regulatory agenda will have a disproportionate impact on smaller firms, with the time, tech and expertise it takes to be compliant increasing fixed costs and subsequently impacting the bottom line.

Therefore, heading into 2023, we expect to see more mid-sized firms turning to outsourced solutions to build efficiencies and avoid the rising cost of high-quality execution, focusing instead on fiduciary obligations to clients.

Linda Gibson, director and head of regulatory change, BNY Mellon Pershing: Resilience and adaptability will be essential strengths for firms through 2023. Trading professionals need to be cognisant of the shift away from the predictable regulatory agenda they are used to as UK and EU regulatory bodies step up their often politicised post-Brexit battle to lure financial services to their respective shores. To date, we have seen UK and EU regulators take different approaches to operational resilience, CSDR and MiFID II, and divergence on rulemaking should be seen as a given moving forward. Politics will continue to shape the UK-EU relationship for financial services, with the UK taking a principles-based approach to regulatory reform while the EU adopts a more prescriptive plan of action. For example, the UK is looking to remove the share trading obligation (STO) and double volume cap (DVC) as part of the Wholesale Markets Review whilst EU proposals will recalibrate or make technical changes.   

In UK policy, we can expect tax reductions and deregulatory initiatives from the government in 2023 and beyond in an attempt to boost international competitiveness and stimulate financially-led GDP growth at a time of economic decline. As outlined in Jeremy Hunt’s autumn statement, this will include a plan to repeal EU red tape and replace it with rules tailor-made for the UK. However, it is important for firms to remember that even deregulation will require internal changes and adaptations. It won’t simply be a matter of switching off on certain compliance matters.

James Baugh, head of European market structure, Cowen Execution Services: We should hopefully get clarity in the early part of the year on where the European Council, Parliament and Commission stand on key issues regarding proposed dark and Systematic Internaliser thresholds and the Consolidated Tape. However, it’s unlikely we’ll see any agreement reached until mid-year or later.

This will depend on whether a compromise can be reached between those looking to compete with the UK versus those considering more inward-looking policies. Regardless, changes are not likely to kick in until 2024. Separately, the FCA will hopefully provide some clarity on several of its proposals, including the UK’s version of the CT. In the interim, the EU and UK will have to contend with a number of operation hurdles in 2023, including the end of the SEC’s No-action letter on “hard dollar payments” for research, which kicks in mid-year and readying for the introduction of T+1 settlement in the US which is currently scheduled for Q1 2024.

Liquidity trends will likely continue on their current trajectory as alternatives challenge the incumbent exchanges for market share and the primary close remains under competitive pressures. Retail will also likely continue to be a topic of discussion into 2023, including whether the EU will impose an outright ban for Payment For Order Flow. And finally, I hope ESG continues to be part of the discussion regarding the improvement of trading workflows and the wider execution business throughout next year.

Hayley McDowell, EU equity electronic sales trader / EU market structure consultant, RBC Capital Markets: Next year will be a critical one for regulation in European equity markets. Approaching two years after the UK formally left the EU, the bloc is still contemplating the future of regulatory alignment with the UK. Despite recent market earthquakes, the UK remains a vital market in Europe and any divergence presents a major challenge to participants from across the spectrum. Next year, the MiFID review will come into sharp focus – as the EU looks to shore up aspects of the regulation while maintaining its competitiveness not just with the UK, but globally.

We can also expect a debate around what an effective consolidated tape looks like – there is a huge opportunity to grow secondary markets – but the success of the tape will depend on the proposals put forward by the EU. Market participants will be keeping a close eyes on the regulatory debate in Europe and whether it will bolster market structure or fall short.

The post The TRADE predictions series 2023: Market structure and regulation, part one appeared first on The TRADE.