James Baugh, head of European market structure, TD Cowen
UK bundling rules are likely to be repealed mid next year, with Europe to follow. Discussions will centre around who pays for research rather than on re-bundling. Although some specialists may see an opportunity here. The question remains as to whether this will have a material impact on SME liquidity. Despite the Swedish Presidency pushing through changes in June, including a single volume cap for dark trading, limitations on SIs and the outlines for a consolidated tape, we’re unlikely to see any major impact next year, perhaps with the exception of the removal of the 4% single venue cap on dark trading, which could be lifted in the early part of the new year.
The transition to T+1 in the US and the impact this has on the UK and Europe is an obvious theme. Improved post-trade efficiencies and initial regulatory leniency will hopefully make this an easier pill to swallow but funding costs and liquidity impacts are yet to be realised. Changes to UK trade reporting requirements will provide a clearer insight into how much business is done away from the public markets, which may court some regulatory attention. The introduction of a new Designated Reporter Regime will also likely be a key focus although some firms will likely want to continue to report as SI or via the off-book on exchange channel.
Hayley McDowell, European market structure consultant, RBC Capital Markets
The buy-side face a dilemma as the UK (and likely the EU) prepare to offer greater flexibility on payments for research. While a full re-bundling is unlikely, we may see an explosion of CSAs as firms look to align their research payment processes globally. As the choice to remain unbundled will be permitted, it might be a slow process for asset managers to make any material changes unless we see larger buy-side firms take the lead on this development. Despite the ongoing uncertainty for participants, 2024 promises to be another eventful year for Pan-European market structure.
Elsewhere, sourcing alternative liquidity will remain a key focus given the continued decline of order book liquidity in 2023. As off-book trading and internalisation grow, concerns about the potential impact on price formation could come to the fore for market participants. With new dark venues preparing to launch early next year, incumbent venues could lose market share in this space.
T+1 will continue to be top of mind as the US and Canada migrate to a shorter settlement cycle in May. As the UK and EU ponder a similar move, reducing market hours could come back into focus, especially given the strained liquidity environment. The LSE’s previous consultation on reducing market hours a few years ago was well received by market participants and it’s unlikely this stance has changed drastically since then.
Mike Carrodus, chief executive officer, Substantive Research
Next year will bring more uncertainty for investment research, with a potential ‘rebundling’ of investment research costs with execution costs under Mifid II, and it will be a year of reckoning for market data. The recommendations from Rachel Kent’s UK Investment Research Review are now with the FCA. We’ll see the FCA’s Consultation Paper in February or March 2024, with the final UK rules coming at the end of June. But what rebundling might look like in practice is uncertain – everything depends on how end investors react to being asked to take on asset managers’ research costs once again.
Also next year, the FCA will reach its conclusion after looking into opaque and inconsistent pricing models and barriers to entry in the wholesale market data market. This is addressing some long-held frustrations on both the buy- and sell-side, regarding these ‘have-to-have’ data products, such as indices, credit ratings and pricing and reference data. AI will help fund managers sift through their research and data inputs much more efficiently, but will a new deluge of AI-enabled research content make finding what we want actually harder?