Gregg Dalley: navigating the new liquidity landscape

Ahead of TradeTech, global head of trading at Schroders, Gregg Dalley, tells The TRADE about the impact of market structure changes on liquidity since Brexit, and provides his thoughts on other hot topics such as SPACs and the consolidated tape.  

Ahead of your participation on a panel discussion at TradeTech’s virtual conference on liquidity in a post-Brexit environment, tell us about the impact of market structure changes since Brexit. 

We were quite fortunate and not massively impacted by the equivalence issue relating to trading venues because we don’t have any EU share trading obligation (STO) clients, so that part has been relatively straightforward for us.

But I think the situation with the Swiss Stock Exchange when they had 100% market share for a period after losing equivalence was a good experiment for the industry in many ways. It took away competition and it went back to a single venue. I’m keen to discuss that on the panel and whether we have gone too far in the debate about the benefits of competition between multiple trading venues, with all the issues that go with that around the availability and cost of market data, smart order routing, plus the impact on volumes, spreads, costs etc. 

With the Brexit scenario, we had a lot of time to prepare, and it was well thought out internally. The execution mechanics might be slightly different, but we still get the same outcome. London has lost its market share as the number one place to trade shares in Europe and most of that share has gone to Amsterdam, but it is just that venue location which has changed. 

When you look at market share and where volumes have migrated to it appears to have had quite high impact, but from the day-to-day point of view it has been very low impact. Whether the smart order router goes to Amsterdam or London, you know you’re getting the same price, at the same time from the same place.

What are the main challenges for traders sourcing liquidity in a post-Brexit landscape?

Operationally the main challenges were around client reporting. There were lots of new MIC codes that suddenly sprung up that nobody had seen before and they weren’t set up in the systems, so there were some issues on the transaction and trade reporting side. It took a few weeks to resolve those challenges. 

Structurally the liquidity hasn’t necessarily changed and it hasn’t suddenly created new participants. However, in terms of coverage, we’ve seen banks moving people to EU destinations and I think that has had quite a big impact. There have been some positive comments from the government about regulation and how they can make the UK more attractive while ensuring there is still a stringent code of ethics and protection. But for London as a trading hub, the impact is potentially much greater than on individual asset managers. 

What are your thoughts on the UK’s decision to loosen rules on dark trading? Is this a positive development for market participants?   

I think the development could take away a complication that emerged from MiFID II. The double volume caps and dark trading rules, even the large in scale calculations, were not quite right. But the market is very good at providing a solution to work around such issues. The outcome will be the same for us, but the venue that we are trading with will potentially be different. It won’t create new liquidity and it won’t take liquidity away, it will just change the mechanics of how it works.

There are other areas too like IPO listings. The UK is trying to make that more attractive, which is quite interesting. It has been a hot topic for years, but it seems things have really started in earnest with that. We, at Schroders, are very supportive of the proposed changes but I am conscious that there are differences of opinion. I’m also interested in other people’s opinions around SPACs as they come into Europe and as the SEC in the US has started to ask more questions regarding these vehicles. Listing can be costly and time-consuming, but safeguards are, of course, needed. If you take away the time-consuming part and some of the costs, do you remove those safeguards? Could it be a regulatory loophole in terms of listing quickly with less insight into the actual company? That’s an interesting area in terms of market structure. 

What other topics are you expecting will be discussed at this year’s TradeTech event?

It’s a very quiet period for regulation that we are going through. There was a lot of movement with Brexit, but that has come and gone quite successfully. The MiFID II review is interesting, particularly from a fixed income perspective, looking at the role of MTFs and OTFs. For equities, it is quite a stable platform and everybody is relatively content. I expect the consolidated tape will be a theme and we have been discussing that since the start of MiFID I. It is frustrating that we have been discussing it for so long and nothing has been done about it. The tape should be much more insightful than just looking at the volume, I think it should go a step further and look at participants’ market share. 

In my view, it should be broken down more so we can see HFT flow as direct members, and then for sponsored access we should be able to see broker access flow, broker client flow, broker proprietary flow – and this is easy to distinguish in terms of market share. That would be very useful, particularly on volatile days as we saw back at the height of the volatility in 2020. Some of the numbers from HFT firms show they were 70% of the volume, which I can believe because everyone went to the order book. But if you want to go back and analyse that period you need to know how much of a part the HFT firms played in that volatility, but you wouldn’t be able to.  

Which panel discussions are you most looking forward to attending at TradeTech this year?

I am looking forward to a number of the panels but the one regarding accelerating trading and automation will be interesting as we have been doing a lot of work in this area across multi asset over the last two to three years. It will also be interesting to hear views on crypto for institutions and the role that will play in the future.