Market changes driven by regulation and technology offer opportunities that should not be stifled by uninformed fear of the unfamiliar, regulators and stakeholders from across the transaction chain agreed on the opening morning of TradeTech 2013 in London today.
Opening a panel discussion on changing roles in the market, Tim Rowe, head of the trading platforms and settlement team at the UK's Financial Conduct Authority, acknowledged that regulators more often than not play a reactive role, seeking to catch up on evolution in the industry.
He pointed in particular to a breakdown in traditional asset class-based silos which has led to functions traditionally carried out by particular market participants being spread among a larger group of providers.
"Regulators are trying to sort this back into buckets, as reflected in the creation of the multilateral trading facility and organised trading facility categories introduced in MiFID l and MiFID ll," he commented, adding that clearing provided a further example.
"Some brokers carry out functions associated with a central counterparty," he said. "We need to assess if they should be regulated as such."
Traders on the buy- and sell-side are also challenged by the erosion of silos. Traditionally, sales traders were accessible in channels depending on the type of asset class being traded. Now, said Michael Seigne, managing director, equities, Goldman Sachs, clients want to make their access choices based on trading attributes rather than channels.
"Our goal is to be a provider of liquidity to our clients, however they want to access it," he added. "The challenge is very similar for buy-side traders as for service providers - the efficient reaggregation of liquidity," Seigne said.
There was also consensus among panellists that changes wrought by regulation might negatively affect the business models of certain categories of market participant, but open up opportunities to others.
"Regulators are responding to events in the market," noted Diana Chan, CEO, EuroCCP. "The push of OTC business into clearing provides opportunities for exchanges to capture some of these trading flows. So while regulation may lead to the closure of some businesses, it provides opportunities for others."
Industrialising forces
Francois Bonnin, CEO, John Locke Investments, suggested that technology was as significant a game-changer for dealers as regulation.
"All these changes come on the back of globalisation and advances in technology. They should be controlled, but not prevented," he said. He described criticism of high-frequency trading (HFT) as the fear of the unknown rather than being based on actual negative impacts.
"HFT will take its place alongside other market techniques," he said. "Personally, I like the fact that my job is becoming more industrialised."
Asked to clarify, Bonnin pointed to the growing presence of what might be termed 'quant mechanics' on dealing desks, though, he insisted, the human element was essential and would never disappear.
Paul Bowes, head of business development (EMEA), equities, feeds & platform, Thomson Reuters, agreed technology was a major driver of change in his firm's service model. "The biggest development in how we service trading clients is the advent of cheap data storage and the ease of retrieval of that data," he said. "The geeks are in charge trading desks."
Amber lights
Despite the generally benign view of changes to date, three panellists pointed to potential dangers.
"One concern of ours in the UK is the extent to which we as regulators start to take away choice," said Rowe.
Acknowledging that regulators in Europe fret about HFT and dark pools, Rowe suggested such concerns must be refined to focus on specific issues so as not to inhibit algorithmic trading unnecessarily. "This is reflected in our continuing negotiations around MiFID ll," he said.
Bonnin argued that dangers to the beneficial evolution of markets are less in the actions of regulators than of governments. He cited as an example the introduction to a proposal by the 11 European countries supporting the introduction of a financial transaction tax (FTT). This, Bonnin said, was an overtly political statement about the need for the financial sector to pay for its mistakes.
Chan meanwhile drew attention to a long-term danger to market health that had so far escaped attention. "We've talked a lot about trading, but what has been missing in the discussion so far is the state of the primary markets. Companies need to come to market for people to have something to trade." Decline in the primary markets is a concern.
Coupled with restrictions on HFT and suppression of algos, "That would damage the equity space," she warned.