A ‘New Normal’ Characterised by Cost Awareness and Reduced Revenue Pools Emerges in Equity Markets

London - 13 March 2014

  • Niche specialist equity dealers and large flow houses are regaining profitability, and mid-size banks and investment houses must rethink their strategies to follow suit. 
  • The race-to-zero latency is over, and technology projects now focus on the convergence of high-touch and low-touch platforms. 

A new piece of research from GreySpark Partners, a London-based capital markets consultancy, examines the state of trading in equity markets. The report, Trends in Equities Trading 2014, which was published today, assesses thenew normal’ that is emerging in equity markets as trading volumes grow and revenue projections become more optimistic. The market friction created by recent regulations in the US and EU, such as MiFID II, are causing market liquidity to decrease. Meanwhile, the quality of available liquidity is improving as the cost of trading in equity markets increases.

GreySpark’s research has found that equity markets are at a turning point as large sellside flow houses and prime brokers prosper again while boutique offerings grow their aggregate market share. The remaining players, primarily mid-size firms, must adapt to this altered landscaped. The fallout from the financial crisis saw the profits of these banks and investment houses squeezed as the cost-per-trade rose, and they struggled to maintain market share. Pre-crisis investments in large-scale, industrial trade processing platforms became costly to maintain. To survive and return to profitability, the firms in question must adopt one of four strategies: specialisation, reduced ambition, monetisation of the franchise and financing volume.

Additionally, the report shows that technology innovation in equity markets has changed direction as the race-to-zero latency and the pursuit of high-frequency trading cooled. The focus now rests on the convergence of high-touch and low-touch trading platforms as the competitive gap between the providers of low-touch and high-touch platforms narrows due to the continuous functionality enrichment of low-touch offerings. Banks looking to reduce their trading platform costs will simplify and consolidate their platforms where possible. GreySpark believes that the coming 18-to-24 months will witness many banks eliminate the need for separate low-touch and high-touch trading platforms as they invest in consolidated third-party vendor offerings. This belief is furthered by a trend towards independent software solutions as the technology stack has become commoditised, and only those functions that offer a competitive advantage will be maintained in-house.

Frederic Ponzo, GreySpark managing partner and lead author of the report, said: “Liquidity fragmentation in US and EU equity markets has reached a point of equilibrium, wherein existing trading venues must drive their own liquidity capture in the face of low costs and increased regulatory burdens. As market volatility rises, dark pool volumes and growth will stabilise, furthering the trend towards a point of equilibrium where liquidity that is spread across lit venues and dark pools is stable.”

Saoirse Kennedy, GreySpark senior consultant and report co-author, added: “Dark pools are a source of relief for liquidity access concerns and offer the potential for product innovation that lit venues do not have. They perform best when volatility is low, and it is harmless to let orders rest on a dark venue, hence the growth of trading volumes on dark pools in the US and in Europe since 2012.”

The Trends in Equities Trading 2014 report is one of four annual reports in the Digital Investment Banking 2014 series. GreySpark will next publish a report examining future changes to the market structure for fixed income trading followed by Trends in FX Trading 2014 and Trends in E-commerce 2014.

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