What do you think should be the regulatory and market structure focus in Europe and the UK over the next year?
Over the next 12 months, I think we’re going to be in a continued state of flux as Europe confirms their position in relation to the Mifid II review and the UK continues to release various consultation papers and finalise their positions following the Wholesale Markets Review. Europe has been through so much change over the course of the last few years with Mifid II and Brexit. It can be a complicated market for investors to navigate and the bifurcation of the UK with the rest of Europe has added to this complexity. We need a period of stability to regroup and develop the market and grow volumes to address some of the liquidity challenges that we see. That’s the really big focus for us at the moment.
In the EU, we’ve talked about the Capital Markets Union and the creation of a single market for years, but we still have an incredibly complicated market structure with a number of listing exchanges, trading exchanges, CCPs and CSDs, all of which need to be sustained by relatively low volumes. Looking at a recent AFME report, there are 35 listing exchanges in Europe versus three in the US, 18 CCPs versus one in the US and 31 CSDs versus two in the US. In addition to the regulatory agenda, I think addressing the front to back complexity and frictional costs that the European structure generates should be a key focus for the marketplace over the coming months and years.
The recent shifts in market share between the primary markets and pan-European MTFs is another interesting theme that is now generating several conversations around innovations and enhancements across markets. The growth of Cboe market share over the last few months is a notable example of this. All venue types serve an important part in the market ecosystem, from listing venues through to MTFs and SIs, and working with key providers to think of ways we can grow volumes and not just fragment the volumes we have is an exciting proposition. Innovation of products, exploring new geographies and a focus on ETFs are all things that we are looking at both internally and with external partners.
In terms of the regulatory agenda, both the UK and EU are clearly focused on ensuring there are robust regulatory structures in place, but I’m really pleased to see a renewed focus on simplicity and evidence-based regulation, allowing regulators to monitor the market and only step in and make changes when it is shown to be necessary. Whether this is how to define an SI, print a trade or allow the continued use of SIs and dark books to the benefit of investors, we will see over the coming months how the regions want their markets to develop and grow.
In light of recent market outages, how should legislators amend regulation around best practices during these events?
Despite the industry’s best efforts to the contrary, sometimes outages do happen, technology does go wrong. What is most important – and this is something that the regulators have been very focused on – is that communication is timely and contains all the necessary information that we need to manage the situation on our side. When we then get post-mortems, they need to contain sufficient detail such that we can learn lessons from whatever the situation is that has happened and try and ensure it doesn’t happen again.
The problem with outages is that often they don’t follow a set sequence of events. It may be that the exchange can’t provide details of filled orders back to members, messages are dropped or the exact issue can’t be quickly identified. This is especially problematic when the outage takes place in the close given the high volumes. For these reasons, we don’t support having an alternative close functionality that would be used infrequently (hopefully!) and potentially just introduce more risk into the system. Instead, having a clear, well publicised waterfall of alternative close prices leveraging, for example, the last traded price is in my opinion a clear and simple way to address this issue. During the recent Nasdaq OMX outage, the fact that they disseminated a last traded price in a timely fashion meant that we were able to manage our risk and client positions.
Where do you expect EU and UK regulators to continue to diverge or align?
The degree to which we see divergence or alignment is in the hands of European regulators with regards to the outcome of the Mifid II review. My hope is that we will see more alignment with the introduction of similar and simplified requirements that could ultimately support the growth of inward investment into the region. That said, there are some areas where divergence would seem likely, for example if Europe was to move forward with the approval of payment for order flow. Currently this doesn’t seem to be something that the UK is looking to support, but time will tell!
Both the UK and EU seem to be moving in a direction that allows regulators to monitor the market, such as in the context of price formation, and step in with changes should issues be identified. This seems a very sensible approach and will hopefully avoid the suggestion in the EU to introduce size thresholds on the use of midpoint trading in SIs and on dark books.
We all know there needs to be improvements in the quality of trade reporting which is being addressed in both the UK and EU, but to the best of my knowledge there is no evidence that the amount of dark and SI trading in the EU is hindering price formation. If anything, post-Brexit the bulk of volume in the EU is now executed on an order book within a transparent market. We want to see growth in the region, and we want to see Europe compete with the US and Asia. To do that we need to support the existence of diverse trading mechanisms across both lit and dark and we need to allow innovation to thrive. We absolutely don’t want any of the proposed regulatory changes to unnecessarily impact the performance of European investors, but rather focus on regulation that bolsters investor confidence in the region, ultimately leading to long term and sustainable growth.