My Top Five Takeaways from ITF

Last week saw the annual gathering of senior equity trading professionals at the International TraderForum in Rome. Cboe Europe is a proud sponsor of this event and the dinner we host on the penultimate day is always one of our highlights of the year.

Kudos to Institutional Investor for delivering yet another fantastic event, with over 200 senior traders from European and US asset managers and owners in attendance.

Here are Natan Tiefenbrun 's five top takeaways from this year’s event. The views are not necessarily those of Cboe – but we welcome your thoughts and feedback.

MAKING EUROPEAN EQUITIES GREAT AGAIN

While it was noted that total European equity trading volumes have improved on 2023 with activity up around 7% year-over-year, the longer-term trend was still one of decline, with on-venue volumes down 19% on 2011. One bright spot mentioned by panellists was a significant increase in block volumes (data from big xyt shows that above-LIS activity is up 25% YoY). This is something we’ve observed through the success of Cboe BIDS Europe, our block trading service and the leading platform in its category for the last two years.

There were lots of discussions (and disagreements!) about how to revitalise volumes, ranging from venue innovation to lower market data costs, and how to unlock an estimated €1bn in “latent liquidity” due to the decline in traditional sales-trading functions. There appeared to be broad agreement on two points:

• European markets have become too complex and costly to access;
• Europe needs to find ways to meaningfully attract retail investors - from within Europe but also globally - with a focus on education and financial literacy to foster more of an investing culture.

EVOLVING OTC MARKETS AND THE RISE OF BILATERAL TRADING

The increase in off-exchange trading was a major topic, with a general consensus that this trend is accelerating. Participants identified factors driving this growth as including sellside appetite to internalise orders (in part due to cost pressures) and the rise of buyside bilateral trading with electronic liquidity providers (ELPs).

On the latter point, some of the major protagonists were on hand to explain their approach, the value they offer, and how they distribute liquidity. Some ELPs prefer to leverage existing buyside-sellside relationships to distribute their liquidity whilst others want to establish direct relationships with the buyside.

While executing against principal capital in this way is common in FX, fixed income and ETF products, in cash equities it was historically the preserve of high touch and portfolio execution. Changes in technology for liquidity distribution and consumption are enabling further integration of principal capital into the buyside workflow. ?Participants debated whether further adoption of risk trading was good for the market as a whole, or risked benefiting the firms involved to the detriment of the wider market. It was acknowledged that the direction of travel is towards a more FX-like model of distributed price formation, but there were questions as to how well this would serve equities as an asset class.

There was general agreement that transparency and granularity of off-venue trade reporting is essential to ensuring the market does not lose sight of the price-formation process.

PERIODIC AUCTIONS ARE NOW MAINSTREAM

Periodic Auctions, and their growth over the last year, was a topic on everyone’s lips. As the pioneer of this market model – and operator of the largest platform in the category - this was no surprise to us! Collectively, Periodic Auctions have accounted for over 9% of continuous trading (~€2.4bn/day) so far this month – with Cboe Europe the clear leader in the category.

Multiple brokers addressed the growth of periodic auctions in their round-robin presentations, including how they are increasingly using these venues to capture near-touch liquidity and using liquidity-seeking algorithms to respond to indicative auction market data.

In our own buyside session, we highlighted some of the new product features that we have introduced over the last 18 months that have helped drive adoption. These include an Accept-or-Cancel order type, Dark-on-Expiry feature, and Near-touch pegs, all of which paved the way for the introduction of our lovingly-titled ‘Super Sweep’, allowing firms to check for price and size improvement opportunities in our Dark and Periodic Auction Books before accessing Lit Order Books through a single order. We also highlighted the benefits that can be achieved by consuming the indicative volume and price market data feed to join auctions in progress or up-size orders already in progress.

ENHANCING EUROPEAN ETF LIQUIDITY

In a panel on ETF liquidity, the usual comparisons were discussed between US and EU ETF markets. The main differences remain the significant levels of retail participation in US ETFs (which has increased from 10% at the start of 2020 to around 25% now, according to panellists) and the fact that the majority of trading takes place on-exchange. In Europe it is the reverse: ETFs are the preserve of the institutional market and execution is primarily via RFQ.

In an audience poll on ETF trading methods, 55% said they use RFQ only, with 38% saying they use algorithmic execution plus RFQ, and 8% algo only. ETF issuers seem keen to encourage greater orderbook liquidity, which will assist in attracting direct retail participation.

Another major issue discussed was the fragmentation of ETF listings across multiple European exchanges, making it difficult to find the other side of a trade, thus necessitating RFQ trading. There was consensus that consolidating the number of listings would help create more liquid instruments, and that the realisation of a consolidated tape would also be beneficial in this effort.

As operator of the first truly pan-European ETF marketplace, and a long-time proponent of a consolidated tape – we agree.

COMPARING US AND EUROPEAN MARKETS

Whilst participants bemoaned the cost/complexity of accessing European markets in comparison to the US, there was a notable change of tone regarding the manner in which new policy/regulation is developed. Historically market participants praised the SEC for its evidence-driven approach, willingness to engage and listen to practitioners, and willingness to run pilot programmes to gather evidence on the impact of changes.

This time, attendees described the SEC has having become heavily politicised, isolating itself from practitioners, and contemplating so many concurrent changes that it is quite impossible to assess (let alone quantify) the impact of them individually or in combination.

From my perspective - having had responsibilities for both US and European equities over the last year - I’d observe that the US market structure (RegNMS and the SEC’s oversight thereof) makes it particularly difficult for exchanges to innovate, whilst affording greater flexibility to broker-operated ATSs and Single Dealer Platforms. Europe, for all the talk about encouraging on-exchange liquidity, risks heading in a similar direction – the prospect of centralised supervision of exchanges on one hand and devolved supervision of brokers on the other risks creating a two-speed Europe when it comes to innovation. The market is best served when competition is open and dynamic, not balkanised.