The TRADE predictions series 2023: Market structure and regulation, part two

Outsourced trading, liquidity challenges, increased buy-side competition and retail participation are subjects high on our experts’ agenda in this review.

By Editors

Simona Stoytchkova, head of global markets and digital, Europe, State Street: Amidst slow resolution of ongoing geopolitical crisis, steady inflation, asset value decline and overall slow economic growth, the pressures on risk and cost control are enormous. With execution costs on the buy side in the billions, and increasing pressure to generate Alpha, we strongly believe next year the need for outsourced trading solutions will magnify. Though initially outsourced trading was designed as a solution for smaller managers, non-core products and limited regional reach, we see continuous demand from larger managers to fully outsource their core execution.

Despite a slow take-up so far due to lengthy implementation, the sophistication on the buy-side requires more and more holistic and bespoke solutions for their execution needs, which are very costly to develop and maintain in-house. The need for multi-asset execution, coverage in emerging markets, regulatory reporting and speed of onboarding of new funds, make it imperative to have access to front to back solutions from sell side, which effectively act as an extension to sell side’s own execution capabilities. This ensures asset managers get better access to liquidity, enjoy a resilient set-up and transfer the risk.

Stuart Lawrence, head of UK equities trading, UBS Asset Management: This year was another year of global geopolitical and macro shocks to challenge the markets.   That said, markets have mostly handled the volatility well and shown resilience in the face of heightened uncertainty and despite decaying liquidity.  We do not know what the new year will bring, but the major issues we have seen have not been fully resolved, so 2023 could be a bumpy ride. Innovation will continue to drive market structure, and I expect to see growth for the relatively new disruptors who are challenging the old, exchange-centric model. 

I think this competition is a good outcome, but liquidity remains key, and those who can offer it in a viable and timely way will be the winners.  We will also be keeping a watchful eye on UK regulation as it further diverges from that of the EU, as this will clearly affect the liquidity landscape.  Further, market structure decisions made in other regions, such as a move to T+1, will no doubt resonate through Europe.  In addition, the drive for more ESG-focus within the industry will become more prominent as well.

Stéphane Boujnah, CEO and chairman of the managing board of Euronext: The process of European integration will continue in 2023. Euronext will lead the way in building simpler, less fragmented markets by integrating Italian cash trading into the Euronext single liquidity pool and with the expansion of Euronext Clearing in Europe. In parallel, the competitive environment for cash equity trading will intensify, albeit with an important shift in the battleground: more than ever, trading venues must demonstrate their execution quality to both sell side and buy side in an objective, quantified manner. Finally, driven by changes in EU regulations, trading venues will enter a period of innovation not seen since Mifid I.

Concerning ESG, indices tracking social-oriented projects will offer new opportunities. On the environmental side, clients will continue to focus on specific themes such as biodiversity as well as increasingly requesting indices aligned with EU Climate benchmarks. The launch of new Euronext ESG indices will help to direct investment to ESG projects.

Jennifer Keser, head of market structure and regulation, Europe and Asia, Tradeweb: With a confluence of macroeconomic and geopolitical factors weighing on markets, liquidity and the cost of liquidity will remain a top priority in the new year. Regulation-wise, the recently published EMIR review could force EU market participants to clear certain Euro-denominated asset classes in EU CCPs. In turn, this could shrink the liquidity pool in Europe and restrict the buy-side from leveraging trading efficiencies, ultimately costing them more to trade and impacting end investors.

However, increased use of e-trading innovations, such as portfolio trading, and new trading protocols, like Request-for-Market (RFM), are positive advances that can help institutions address liquidity challenges. Another market structure development that would provide investors with better post-trade data and help improve pre-trade decision-making is the long-awaited consolidated tape. Next year, we should see industry discussions and collaborations on the tape intensify, bringing us one step closer to its establishment.

Sakeena Lalljee, director of business development, Aquis Exchange: We expect to see growth in alternative closing auctions, as trading firms adapt and adjust to incorporate these in their trading strategies. The Aquis Market at Close (MaC) service, for example, grew from an ADV of €400 million to €598 million between November 2021 and November 2022, reaching a high of 7.1% of European closing auction trading in October. We expect to see this trend continue into 2023.

Robin Mess, CEO and co-founder, big xyt: The industry is approaching its sixth year under MiFID II. Despite some progress with the consolidated tape, the scope and availability for the various asset classes remain uncertain and will be carefully observed next year.  While the CT is gaining shape, market participants will have to adapt to market structure changes. In the third year after Brexit, these will be driven by regulatory reviews with potentially diverging legislations. Competing venues that will try to grow or regain market share will also create challenges for algos and SORs – whilst we might see further consolidation amongst sell-side firms.  The unresolved geopolitical situation, global inflation and interest rates will continue to have an impact on volatility, liquidity and execution costs. Trading desks and portfolio managers will need evidence for their decisions. A reliable view on market volumes, market quality, liquidity forecasts and execution performance will remain a key requirement for market participants.

Anish Puaar, head of European equity market structure, Optiver: It will be a crucial 12 months for retail investor protection as regulators press ahead with much-needed reforms. Retail participation in European markets recently hit a fresh high, so there’s an opportunity for the industry and policymakers to keep the momentum going. Despite repeated efforts to reach a consensus, an agreement on payment for order flow in the MiFIR review remains elusive. At an absolute minimum, the EU should ensure PFOF rules are applied consistently across the Union.

Authorities should also pay more attention to promoting competitive trading models. Some markets are set up in a way that gives a single market maker exclusive access to retail orders, where best-execution is less likely to be achieved than in a true multilateral market.  What’s the best way to stimulate retail investor interest in exchange-traded products like listed equities, options, futures and ETFs?

There seems to be a worrying bias in Europe toward lookalike structured products, that go by names such as contracts-for-difference, turbos, warrants and sprinters. If these offer the same exposure as exchange-traded products but with less transparency and higher costs, why aren’t the markets doing more to promote the latter?  With carefully targeted trading and market reforms, we can be in a great place to boost retail participation and create more diverse capital markets in Europe over the next 12 months.