Looking back at 2013, it has very much been a year of two halves, though not in the chronological sense, as economic ‘green shoots’ met tough new regulations. The coming year looks as if it will be equally mixed, though might finally provide firms with some certainty about the longer-term picture.
Most market participants will agree 2012 was a particularly difficult year, with record low volumes and little prospect of Western economies making a sustained recovery.
For Rob Boardman, CEO of agency broker ITG Europe, the improvement in economic prospect seen in 2013 has been a key highlight of the year.
“I think the big story of the year is that the UK economy is back on track, though unfortunately things are not quite so bright in Europe,” he said.
The spectacular turnaround in market sentiment also caught the eye of independent consultant and former Instinet Europe CEO Richard Balarkas, though he’s less sure about how things will pan-out.
Referring to records seen on major indices, including the S&P 500 and Dow Jones, he said: “I can’t recall a time when the market has been so bullish, and it’s not just in the UK and US. Markets are also very strong in some of Europe’s problem countries, including Greece.”
“My concern, however is that this increase has not been matched by turnover,” he added.
Regulatory ruckus
The other major theme of 2013 was, much like previous years, ongoing reforms to market structure. However, the past twelve months have perhaps seen the most progress on this front since the financial crisis hit in 2008.
“If you think about the 2013 agenda, it’s really about the end of the beginning. What the G20 asked for at the Pittsburgh summit has largely been actioned,” said PJ Di Giammarino, CEO of financial IT analyst JWG.
Sean Owens, director at consultancy Woodbine Associates, agreed that 2013 has been a year of getting ready and said: “The last 12 months have focused on preparation as firms work towards regulatory compliance across operations, systems and business practices, especially for Title VII of the Dodd-Frank Act."
The hard work starts
So, if 2013 has been a year of preparation, 2014 will be the year when the industry actually implements and grows accustomed to many of the reforms that have been in the making for so long.
“The industry is at the starting line, and in 2014 participants will see the impact of OTC derivatives reform on trading and clearing as the market evolves with these major regulatory changes,” explained Owens.
For Frank Troise, global head, electronic client solutions, JP Morgan, there are still regulatory issues to be ironed out and finalising rules on market structure will remain a priority.
“In 2014, we will be engaged in market structure discussions, such as trading in ATS, the possible tick size pilot, and transparency, these are all important topics and outcomes which will affect our core business – achieving best execution for our customers,” he said.
In Europe too, legislators have not come to an agreement on the final text of MiFID II yet, with talks on the crucial piece of regulation set to resume on 14 January.
Challenges to come
From a business perspective, Balarkas suggests that 2014 will be another tough year for the sell-side, with profitability continuing to be squeezed.
“If you look at the bulge bracket, it’s in dire straights right now and next year those brokers are going to have to shed about a third of their cost base. We’re going to see massive restructuring in the sell-side and this will have consequences for the whole market.”
The economic front is also facing some uncertainty, with the market still highly reliant on stimulus provided by central banks. ITG's Boardman believes the way this plays out in 2014 could be crucial to the way institutional investors perform.
“The big question is ‘when will tapering end in the US?’ We’ll also be keeping a close eye on how aggressive or gently the Federal Reserve withdraws its support as it’s an operation which requires a lot of foresight,” Boardman explains.
Whatever 2014 brings, theTRADEnews.com will be there to keep you up to date with all the latest developments and analysis.