European Equity Trading 2016: The Liquidity (R)evolution

The continued delay in the implementation of financial regulation frustrates industry participants, but it is not the only challenge facing European equity trading. Wider economic and technical fundamentals continue to push a reluctant industry toward the precipice of wholesale change. Exiting of business strategies, declining return on equity, and the retraction of a capital-intensive sell-side is creating a vacuum waiting to be filled; initiating a wider debate over how European equity trading can and should operate.

Change is not only occurring on the sell-side. European asset managers face a daunting surge in complexity and accountability, while losing traditional methods of interaction and execution. Assets continue to consolidate under mammoth super asset managers where asset ownership is dominated by a diminishing number of key players. Greater unbundling, the loss of traditional client facilitation of order flow, as well as forthcoming regulation such as the closure of BCNs and imposition of SIs will force a rethink of current methods of accessing liquidity, finally severing the cord between traditional brokerage relationships for many.

Post MiFID II, voice and OTC trading will still be available - just not for all. As liquidity becomes harder to locate, alternative methods to access liquidity will need to be found. The more manual the process, the more expensive the provision of liquidity will become. Technology will assist in new initiatives ensuring the champions of change will no longer only be the sell-side, but also the underlying venues themselves.

As buy side requirements shifts, so do the providers of services. While some on the sell-side have embraced the agency model, not all can survive as traditional providers of liquidity. Others are redesigning business models based on the provision of capital intensive services and collateral management.

The powerful combination of economics, technical innovation and increased regulation will continue to move the dial on redefining the European capital markets ecosystem – who owns liquidity, how it is distributed, who pays and how. The change is emerging in small, incremental steps that while individual changes may not be noticed, the accumulation of total change will become the groundswell of a liquidity revolution. Its eventual impact on European market structure will be profound.

To understand the challenges facing European Equity Trading, TABB Group interviewed 48 equity buy side head traders during September 2015 to January 2016, whose firms manage €24.8 trillion in assets under management (AUM) worldwide. This year’s report contains responses from 78% of the same firms who participated in 2014, and 71% of the same firms from 2013.