The first full day of TradeTech Europe 2013 got underway on Wednesday 17 April at London’s Excel Arena but many attendees were delayed in getting there due to ex-Prime Minister, Margaret Thatcher’s funeral that day, which caused traffic and travel chaos due to road closures for the grandiose occasion. It didn’t stop an argument breaking out about dark v lit trading, however, between representatives of the Turquoise and Xetra venues - it’s what she would have wanted - declining equities volumes, and updates from ESMA and the EC about MiFID II and other regulations, to bring attendees back down to earth with a bump, reports Neil Ainger
The clocks may not have been stopped, to paraphrase the poet WH Auden, but the roads certainly were in London for Margaret Thatcher’s funeral procession to St Paul’s cathedral on 17 April. Nothing stops the clocks in the world of trading, however. As attendees at the TradeTech Europe 2013 conference know full well speed is of the essence in many a trade, as the loud debates about the merits or otherwise of high frequency trading (HFT) and its ‘transparency’ at the trade show held in London’s Excel arena demonstrated. Many of the trading and technology delegates also reflected on Thatcher’s ‘big bang’ during the coffee breaks which deregulated the City of London in the 1980s and opened it up to the various attendees at TradeTech Europe 2013 - not to mention the fact that it was held in the old ‘docklands’ area of London which the controversial ex-PM regenerated.
There was a stark warning from Diana Chan, chief executive officer (CEO) of EuroCCP after the delayed start to TradeTech in the morning, about the severity of sharply declining equities volumes. During a panel discussion entitled ‘Debating the purpose and value of the markets: are players changing roles and what will become of the trader?’, Chan warned that her concern is “there will be fewer and fewer stocks to trade” due to the decline in primary listings, mentioning that the secondary markets seems to be where the competition and the action is at the moment. “I am concerned about what this will do the equities space,” added Chan, referencing the debate about plunging equities volumes, before going on to cite the European Financial Transaction Tax (FTT) as another potential downward driver.
Some of those secondary markets were up on stage next for the panel discussion entitled ‘Analysing the emergence of the new breed of trading venue - threat or opportunity?’ with Christopher Gregory, CEO of Squawker, Alasdair Haynes, CEO of the Aquis Exchange and Tony Mackay the founder of MarketBourse, all illustrating the threat that traditional exchanges and even newer multilateral trading facilities (MTFs) like Bats Chi-X, face from new trading venue entrants that seek to use the world of social media, or other new innovative technologies or business models, to shake-up the existing marketplace.
“Squawker is a negotiation venue started at the end of last week,” explained Gregory, “which has 36 signed and connected firms at present and 45 sell-side firms being on-boarded right now. It is not a dark pool of liquidity or a trader book, as we match counterparties not orders, rather it is a negotiation venue that uses social media concepts.”
The new secondary venue looks at requests it receives and then invites buyers and sellers to speak anonymously to carry out a block trade, using standardised FIX messaging [see the FPL show report HERE].
The Aquis Exchange and MarketBourse are also offering innovative new services to financial market participants, but the former’s CEO Hines explained “out model is based on the telco industry so it’s a subscription model where smaller players pay per message or larger clients can get ‘all you can eat’ data and messaging services with us”. Tony Mackay of MarketBourse discussed the unusual symbiosis of the retail and wholesale markets in trading at the moment and how he believes this will split further in the coming years, with his new offering perhaps sitting in the middle and linking everyone.
Dark v Lit Liquidity
In the next session an argument about the merits or otherwise of dark pools of liquidity and deregulation, versus traditional ‘lit’ exchanges and open public order books, broke out between the newly appointed CEO at the London Stock Exchange’s (LSE) Turquoise trading unit, Natan Tiefenbrun, who started at the end of last year, and Michael Krogmann, executive vice president of market development at Deutsche Börse’s Xetra platform. The panel was supposed to be about ‘Discussing the value and future landscape of trading venues – will their business model and proposition have to change and how? but really turned into a dark v lit debate after Tiefenbrun said he was worried about a drive to eliminate dark trading in Europe with some firms trying to get the old ‘concentration rule’ back which was cancelled under the stipulations of the first Markets in Financial Instruments Directive (MiFID) which removed the need to concentrate trades on a national exchange.
“We are all agreed that the Pittsburgh G20 started the move to increase the financial markets more tightly after the 2008 financial crisis, and I am fine with that, but what I do worry about now is that agenda is being hi-jacked by narrow commercial lobbying, rather than a genuine drive for better markets,” said Turquoise’s Tiefenbrun.
Xetra’s Krogmann, took exception to this, saying that he believes there are real benefits to concentrating liquidity. “I truly believe in the public value of transparent price discovery,” he said, before going on to later qualify that he did believe MiFID I and the flood of new MFTs and trading venues it introduced to Europe last decade was a good thing. “But it also introduced market fragmentation so more transparency is now necessary,” he pertinently added.
Mark Hemsley, CEO of BATS Chi-X Europe, waded into the debate by pointing out that in the US dark orders can go lit on a public order book but in Europe politically this isn’t possible in the current ‘anti-market’ environment, leaving us with “a bad market structure”. The market wants lit and dark orders in the public order book, he added.
Kee-Meng Tan, managing director and head of electronic trading at Knight Capital, joined in by admitting that retail investors had been almost “abandoned” in the reformatting of the European markets that is now going on under MiFID II, due to report this summer, before agreeing with Nathan that there is “some very strong lobbying going on at the moment”, while still warning that “legislators should not play politics” and try to unwind the MiFID I or its opening out of the exchanges marketplace.
Jens Jacob Foged, head of trading at Sparinvest SA, speaking for the buy-side, said that he thought MiFID II will improve market surveillance, reducing market abuse in the dark, and what he termed “predatory trading strategies”, sounding a clarion call for tighter oversight.
MiFID II and Regulation
The other interesting session of the day at TradeTech Europe 2013, before it split into separate streams covering trading architectures, execution, emerging markets, and the over the counter (OTC) derivatives rule changes, where centralised counterparty clearing (CCP) and more transparency is necessary under Dodd-Frank in the US and the European Market Infrastructure Regulation (EMIR) here, was a session dedicated to MiFID II. This contained contributions from Rodrigo Buenaventura, head of markets division at the European Securities and Markets Authority (ESMA) and Jasper Jorritsma, a policy officer at the European Commission (EC), directorate general (DG) of internal markets and services, and was entitled ‘A word from the regulators’.
The EC’s Jorritsma provided an update about the timeframe for MiFID II, which will lead to Organised Trading Facilities (OTFs) - essentially anything they missed the first time around when designing multilateral trading facilities (MTFs) under MiFID I, and fundamentally change the marketplace again. He maintained that the European Council, which is the member states themselves rather than the ‘federal’ EC, is aiming to end the MiFID II discussions this summer under the Irish presidency of the grouping, but in true civil service fashion added that “I can’t promise this timeframe will be met” [as it’s out of his hands]. The key points that MiFID II will address were listed by Jorritsma, covering:
- Market structure.
- Open access to clearers.
Other issues such as the need for enhanced collateral requirements were also added by the moderator Niki Beattie, of the Market Structure Partners consultancy, and panellists Ari Burstein, senior counsel for securities regulation at the Investment Company Institute and Ruben Lee, CEO of the advisory Oxford Finance Group.
Lee added that: “we’re in a very highly politicised situation, with the public blaming the downturn on the FS sector, which is incentivising regulators to go for maximum transparency in all things, but this isn’t always a good thing [as it can lead to stagnant markets and declining liquidity].”
It was a viewpoint supported by Burstein who said that at the end of the day the buy-side just wanted choice. “We cannot trade everything we want in lit markets, which is why RegNMS came to the US and MiFID to Europe. But there has to be some way to get more orders and volumes into lit markets - whether they are OTFs/MTFs or whatever doesn’t matter.”
The spectre of declining volumes was never far from the minds of delegates at TradeTech Europe 2013 it seems. Whether this trend was blamed on HFT, a lack of effective measures about market abuse and hence declining trust, or simply normal market forces, depended upon who you talked to at the show. But one thing is for sure and that is that with the current fragmented markets technology oversight systems, reporting solutions, and integrated trading and clearing platforms, with associated connectivity, are all still going to be necessary, and there is still business to be won by the exhibiting companies on the trade show floor to be won.
The future shape of the markets is unclear, with various regulatory and market forces such as the rise of emerging markets, pressing down upon traditional structures, but whatever shape they reconfigure themselves into over the coming years supporting technology infrastructures will continue to be vital.