European trading volumes heading ‘anywhere but the primary’, finds Liquidnet report

In its latest liquidity landscape report, Liquidnet finds entrenched themes such as the move away from the lit markets and the migration to the Close became increasingly pronounced last year.

European trading volumes are heading “anywhere but the primary”, Liquidnet’s latest liquidity landscape report has found.

While this is by no means a new trend, Liquidnet’s report found the situation is worsening with the proportion of notional volume when excluding auctions falling from 40% in the first quarter of 2020 to 30% in the fourth quarter of 2022.

Alongside the decline of lit primary, other ongoing patterns such as the migration of volumes to the Closing Auction also appear to be intensifying thanks to market conditions and the growth of the passive segment. According to Liquidnet’s report, nearly 30% of order book traded value in Europe is now in the closing print.

“Wider changes in macroeconomics from the war in Ukraine, the post-Covid recovery and rising interest rates have triggered shifts in sector and company valuations leading to large index restructuring,” said Liquidnet in its report.

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Fragmentation across Europe in how countries execute trades is also intensifying and “hampering the growth of cross border activity”, said Liquidnet.

Dark trading for example accounts for just 5% of the Italian markets in contrast with 12% in Stockholm and Copenhagen.

“With the greater fragmentation across European markets and methods of trading, and as continuous liquidity becomes harder to uncover, trading strategies will continue to evolve as a result,” said Liquidnet.

One such strategy identified by Liquidnet is the use of systematic internalisers (SIs). Liquidnet’s report found that SI activity is increasingly trading in smaller clips with average execution size falling steadily over the last few years while the average daily principal also decreased from around €10 billion at the start of last year to under €5 billion by the of December.

“Historically the argument has been UK trades principal, European trades agency but this appears to no longer be true. The UK in general sees lower average execution sizes alongside a lower average daily principal than the wider EMEA region,” said Liquidnet in its report.

“However, from our research an interesting note here is that when looking at % of volume executed in SIs, we see the UK ranking a collective third in SI % executed volume alongside Helsinki, Frankfurt, and Paris.”