Fragmentation is no longer a new frontier for European markets, however, as market participants become more adapted to liquidity and execution shifts, desks are still under pressure when trading in these fragmented markets.
According to a recent xyt survey, 63% of survey participants cited regulatory demands as their biggest performance problem in these markets, while achieving consistent execution quality across brokers, venues and benchmarks was the key issue for 56% of respondents.
Reflecting on these findings, the report indicated that while liquidity may exist at multiple venues, spread across exchanges, MTFs, dark pools and bilateral channels, without consistency at the data layer, measuring execution quality and harmonising and interpreting data becomes a key barrier for many European market participants.
Similarly, many performance constraints increasingly boil down to infrastructure, specifically, the quality and consistency of inputs which feed into the tools used on desks.
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Data, in particular, remains a core challenge, with 77% of respondents indicating that data quality and normalisation across sources is their main obstacle when trading in these markets.
Commenting on this in the report, Yven Scholz, head of electronic trading at Allianz Global Investors, said: “I think the key limitation is really a data issue. You need to be able to access real-time pre-trade data that’s relevant to what you’re actually trading.
“That probably comes down more to the skills and capabilities within the trading team to be able to integrate and leverage that data, rather than just a lack of resources.”
Fragmentation is the new normal
Although it has dominated market discourse for many years, perspectives on fragmentation now appear to be perceiving it as a baseline in European markets.
For 69% of respondents in xyt’s study, market complexity caused by fragmentation has remained largely the same, or has only increased slightly, indicating that structures such as multi-venue routing, cross-market reporting, and dispersed liquidity sourcing are now embedded within trading workflows.
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Despite this, fragmentation still shapes modern markets, albeit as a naturalised part of European market structure, and the variety of liquidity pools may impact trader interaction and activities.
Specifically, the survey indicates that only 18% of respondents are confident in having a reliable view of liquidity before placing a trade, while 65% said they were merely or moderately confident, and a further 17% have little or no confidence.
When looking to address challenges with gaining a strong pre-trade market view, insufficient market and instrument-level visibility came out on top as the key barrier, with 57% of respondents highlighting this as the biggest factor limiting the quality of their pre-trade liquidity view.
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“I may have a reliable view of what is visible on the book, but understanding where hidden pockets of liquidity sit is far more difficult,” said Hugh Spencer, global head of trading at Janus Henderson Investors.
“Given the size of the orders we transact, it’s unrealistic to ever be completely confident based solely on visible liquidity. There’s an intentional trade-off here: the opacity of certain venues exists to facilitate interaction with dark liquidity and conditional orders.
“In that environment, being moderately confident is often the best achievable outcome.”
The standardised data hurdle
In addition, a lack of standardised data to compare liquidity across venues and brokers was also cited by 55% of respondents, again emphasising the inherent data and infrastructure challenge within European markets.
Speaking on this, Fabiana Fedeli, chief investment officer, equities, multi-asset and sustainability at M&G Investments, said: “I’m not surprised at all by these results. Particularly because regulatory demands and data quality and normalisation across sources are the two biggest challenges. I also believe that quality data and normalisation are becoming an even bigger challenge, particularly as we use artificial intelligence in most of our operations; the quality of data is going to be paramount.
“The speed of analysis and response to that data by these AI models is such that if the base is not strong enough, then the impact of making an error is going to become even bigger.”
Looking ahead, while fragmentation may now be the norm in European markets, core infrastructure such as data remains an obstacle for traders in these markets, and the firms that succeed will be those that are able to manage, standardise and effectively leverage high-quality data and infrastructure in an increasingly complex trading environment.
To collate its report, xyt surveyed senior trading and market structure leaders from across the European execution landscape, spanning asset managers, hedge funds, private banks, brokers and investment banks.