The early year European equity market rally could stall with implementation of liquidity-damaging regulatory policies including financial transaction taxes across the region.
The analysis, from consultancy TABB Group, uses the recently implemented FTT in France as an example of what may happen to overall European liquidity under regional proposals.
Since the introduction of the French FTT – a 0.2% levy on net buys of Paris-listed stocks that have a market cap of €1 billion or more – in August 2012, the study notes that the proportion of European trading conducted in French stocks fell to 11.88% in January, from 17.3% in 2011. Overall equity turnover dropped by 26% in France last year.
Proposals for a tax in Europe backed by 11 member states under an arrangement known as ‘enhanced cooperation’, will tax equity transactions at 0.1% and derivatives at 0.01% of notional value.
“Coupling recent regulatory attempts to target model-driven equity trading flow alongside high-frequency trading may well have a drastic impact on the formation of liquidity, creating new challenges for every euro-zone market participant,” said Rebecca Healey, senior analyst, TABB Group, and author of ‘European equity markets: 2013 state of the industry’.
The paper also suggests the ongoing automation of European equity trading – predicted to rise to 58% this year from 54% in 2012 – could be causing some institutional traders to reduce order flow, rather than navigate fragmented markets.
“Without natural orders to ease the flow of liquidity, we risk returning to volatile markets, which will further deter investors,” read the report.
In terms of the commissions paid to brokers by long-only institutions and hedge funds, the study foresees a 3% rise this year to €6.02 trillion, rebounding from the 16% decline experienced between 2011 and 2012.
“The traditional role of the sales trader as order creator rather than order taker will resume, particularly in less-liquid European markets with small- and mid-cap names, which will positively impact European commissions in 2013,” the report stated.