Geir Lode, head of global equities, Hermes Investment Management
Since the financial crisis in 2008, growth has consistently outperformed value. This outperformance has accelerated since 2017, to the extent that growth is now more expensive than at any time since the Tech Bubble at the turn of the century, even allowing for September’s value rally. Global economic indicators have started to worsen, exacerbated by the US-China trade tensions, Brexit uncertainty, Middle East tensions, protests in Hong Kong and numerous other geopolitical risks and flashpoints.
This backdrop has polarised investor sentiment and prompted sharp swings in risk appetite, which may be a signal that the drivers of the current bull market are becoming less sustainable. A market inflection is likely to normalise the relative valuation between growth and value. However, as growth rates decline, the likelihood of lower interest rates increases, with some equity investors welcoming weak economic news in the hope that this will prompt central banks to cut rates further, propelling markets – and growth – even higher. As such, predicting when the growth rally is likely to end is extremely difficult.
James Baugh, head of EMEA equities market structure, Citigroup
Brexit will be front and centre of discussions in 2020. Whether we see its true impact on share trading in the UK and in Europe next year is to be seen. However, concerns remain the MiFID II Share Trading Obligation may lead to further fragmentation and complexity. This could see a swing in favour of doing more business on primary markets but also towards an increase in high touch trading and risk business away from execution wheels, which could lead to an increase in the cost of execution.
Matching at mid-price on periodic auctions and the ability for systematic internalisers to offer price improvement below large-In-scale will also come under further scrutiny, with the likelihood it will disappear altogether. Next year may be the year the industry decides to introduce a consolidated tape and reduce trading hours for equities markets, but we will unlikely see any real impact during 2020.
Alasdair Haynes, CEO of Aquis Exchange
Let’s hope that 2020 will live up to its name and be a year of clear vision. After years of political uncertainty which has held back market turnover, we are all looking forward to going back to normality. I believe the investment banks will see further retrenchment and be forced to adapt their business models, recognising that a paradigm shift is required for long term survival and growth. The clear focus for them will be on costs. Elsewhere, the importance of data – its ownership, storage, distribution and price – will continue to grow and, I suspect, take centre stage next year. Within my own sector, and not withstanding Hong Kong’s abortive tilt at the LSE, it looks like the battle of the bourses will continue apace with the BME being the latest exchange to be fought over. I expect 2020 will be a pivotal and exciting year for much of our industry.
Anish Puaar, European market structure analyst, Rosenblatt Securities
Depending on the outcome of Brexit, we may see politically-driven liquidity fragmentation that could hurt investor performance. If Britain leaves the EU without a deal, MiFID II’s share-trading obligation will restrict where certain shares can be traded, according to whether market participants are based in the UK or in the European Union. The European Securities and Markets Authority has laid out the EU’s stance on this issue, but the Financial Conduct Authority is yet to make its position clear. London could lose its position as the home of alternative pan-European equity markets as trading moves to the continent, which could raise transaction costs.
Longer-term, we could see further regulatory divergence, with distinct rules in the UK and EU for periodic auctions, systematic internalisers and commission unbundling. Several EU regulators have complained about the new unbundling regime, while the FCA has lauded it. With the European Commission already planning targeted adjustments to MiFID II, these fissures may appear sooner than expected.
Gary Paulin, global head of integrated trading solutions, Northern Trust Capital Markets
We believe the active management industry needs to cut costs by around 40% over the next five years to keep the cost curve ahead of fee compression. This is going to force many market participants to radically rethink their operating models and consider outsourcing their front office. The problems don’t stop with costs; there are also new structural forces at play that will continue to reshape the market going into 2020 and beyond. Factors like increasing competition from passives, complex technological shifts and regulation focused on transparency, accountability and fairness will continue to drive a third wave of outsourcing in the wake of the middle and back offices in previous decades. I predict that more firms will shed the fixed costs, complexity and risk of in-house trading, instead choosing to focus on their core competency – the pursuit of Alpha.
Scott Bradley, head of sales, marketing and business development, LSE Cash Secondary Markets and Turquoise
With geopolitical and regulatory uncertainty around Brexit planning taking up much of the focus and resource for 2019 and with two years of post MiFID II experience now digested the trading community will be looking to drive further innovations in the search for meaningful liquidity. New trading channels such as Frequent Batch Auctions have continued to gain support for their quality outcomes in all sizes of execution and the second half of 2019 saw record numbers in Conditional Dark block trading mechanisms, a sign that investors and traders alike are keen to capture mid-point block opportunities. 2020 will continue to see us work closely with market participants to foster the best possible liquidity ecosystems taking into account the myriad of changes which have taken place over the past two years and to reflect the changing face of the customer in Cash equity markets.
Dave Howson, chief operating officer, Cboe Europe
With some clarity around Brexit in 2020, I think we will see investors return to the market and volumes increase. I think we will also see the formulation of MiFID 2.5 that takes into account the new dynamic that will exist between the UK and EU as a result of Brexit. As such, we’re pleased to see regulators moving forward with a consolidated tape, which we believe is a critical component to healthy, vibrant and interconnected European capital markets.
Len Delicaet, head of regulatory reporting strategy, MarketAxess
The laser-like focus on granular data issues was laid bare in two FCA MarketWatch industry news letters, two public MiFID I enforcement cases, and ESMA’s review of EMIR supervision by six NCAs with a best-practice recommendations section reading like it could be applied across the board to any regulatory report. Firms who take note of these messages will set to work to investigate, escalate and correct any instances within their estate. And this is precisely why NCAs communicate this learning. In addition, in 2020, two ‘higher-level’ frameworks add further challenge to regulatory obligation management: SMCR and Operational Resilience.
As a metaphor, SMCR reads: if a tree falls in your reg forest, did the relevant senior manager hear it? Operational Resilience is more serious, as it progresses from consultation phase to eventually becoming regulation it could demand that a firm’s reporting function takes ownership to ensure they are not impacted by change management failures, third party-failures and software/application failures from harming data quality.
Gernot Schmidt, product manager for regulatory solutions, SimCorp
From our buy-side discussions, we’ve found that data continues to form the critical concern when it comes to regulation and this will play forward into 2020, with the introduction of SFTR. And while the reporting regime may be structurally similar to EMIR, the buy-side cannot write off SFTR as just another EMIR and take a piecemeal approach. Consolidated operations and robust regulatory reporting combined, can truly tackle the sheer impact to the both business and the bottom line. A change in approach is necessary and cloud full-service solutions from service providers will play a pivotal role in helping firms to achieve a low TCO for regulatory reporting and subscribe to an ‘always compliant’ solution, so buy-side firms can get back to the business of Alpha generation.