Equity market activity is tipped to bounce back this year, according to the latest TRADE poll, with almost two thirds of market participants looking forward to a more positive trading environment in 2010.
Sixty-five percent of poll respondents predicted higher equity volumes this year, while 21% thought trading levels would stay on a par with the previous twelve months. The remaining 14% anticipate lower equity volumes in 2010 compared to 2009.
Although global economies continue their gradual recovery from the financial crisis that ravaged virtually all financial markets after the collapse of US investment bank Lehman Brothers in September 2008, regulations designed to curb excessive risk and shore up markets on both side of the Atlantic could counteract improving market sentiment.
Both the European Commission, via its impending MiFID review, and US regulator the Securities and Exchange Commission, through its current equity market structure evaluation, plan to conduct widespread investigations of equity markets. High-frequency trading, a major component of equity market activity, is also likely to on the regulatory agenda in 2010.
But according to Graham Dick, head of business development at Chi-X Europe, who attended a recent European Commission consultation on high-frequency trading, believes regulators are sensitive to fears of reduced liquidity.
“The regulators’ knowledge of high-frequency trading has increased and there seemed to be a general consensus that high-frequency trading is an evolution of technology as opposed to an exploitation of regulation and market participants,” Dick told theTRADEnews.com. “We wouldn’t anticipate significant regulatory change in the governance of high frequency trading.”
Radical attempts to curb risk-taking by investment banks may also depress volumes, most notably the recently floated introduction of a so-called Tobin tax, a small tax on financial transactions, in the UK and US president Barack Obama’s plan to restrict prop trading. However, given the political sway of some larger financial institutions, imposing such constraints may be unlikely in 2010.
One factor that may support rising equity volumes is the return to full strength of bulge-bracket services that may have been pared back in the last year.
“The provision of capital commitment is on the increase, providing liquidity and increasing overall market volumes,” comments Toby Bayliss, head of algorithmic and program trading, Europe, Sanford C. Bernstein. “New entrants, keen to capture market share, appear to be driving this change with the more established participants following suit.”
Bayliss also predicts increased volumes on multilateral trading facilities (MTFs) in 2010, but not necessarily at the expense of primary trading venues.
“MTF operators wishing to gain market share will continue to offer aggressive pricing strategies and rebate incentives,” says Bayliss. “This improves the efficiency of market maker strategies and attracts new participants to utilise these venues, which could lead to a significant uptick in volumes.”
Chi-X’s Dick agrees, and confirms that new participants from outside Europe continue to join the MTF.
“The low execution costs, low latency and increasing amount of liquidity available on our platform has attracted a number of new participants from Europe and the US. This includes a number of US hedge funds and other investors who have never traded in Europe before that are connecting to Chi-X Europe via sponsored access,” says Dick. “We are definitely seeing the overall level of liquidity in Europe growing since the launch of MTFs.”
MTFs have already started the year strongly. BATS Europe surpassed €2 billion notional value traded for the first time on 21 January and Chi-X reached a record market share in FTSE 100 stocks, reaching 28.86% on 28 January.
The future looks bright for equity traders this year as all sides of the industry seek a return to form.