THETRADETECH DAILY THE OFFICIAL NEWSPAPER OF TRADETECH 2024
Fabien Oreve :
Fixing Europe ’ s future markets
The TRADE sits down with deputy global head of trading and securities financing at Candriam , Fabien Oreve , to explore the future European trading landscape including solutions for low volumes and increased fragmentation , the role of the central limit order book ( CLOB ) and the new generation of order and execution management systems ( OEMS ).
Where should regulators be focusing their attention to boost volumes in Europe ? The levels of trading volumes in European equities are influenced by a complex interplay of various factors like market fragmentation , economic conditions , monetary policy , investor behaviour and market volatility among other things . Market volatility was low across European stock indices in Q1 2024 , compared to the same period last year , partly explains lower volumes across European cash and derivatives equity markets . A couple of other important factors which could help increase volumes in Europe would be to encourage the involvement of retail investors in the EU equity markets and , also the growth of small cap businesses , reducing complexity and costs for listing . However , regulators are not the only ones that could quickly help address these complex structural issues in Europe .
What is the role of regulators in addressing fragmentation in Europe – if any ? Market fragmentation has increased over recent years and led to the dispersion of trading activity across primary exchanges , lit and dark multilateral trading facilities ( MTFs ), banks ’ systematic internalisers ( SIs ) and electronic liquidity providers ’ ( ELP SIs ). The EU regulators have an important role to play to help all equity market participants get a clearer picture of post-trade data across all these execution venues , including to help show consistent flagging of trades and addressable liquidity for all investors in the EU equity markets .
Are central limit order books still fit for purpose ? Central limit order books ( CLOBs ) across primary exchanges remain a significant part of the trading ecosystem for European equities . CLOBs are still fit for purpose because they facilitate the price formation process in European equity markets for the benefit of all market participants . However , trading equities in CLOBs bring its own challenges , such as the risk of information leakage for the institutional traders who work large-size orders . Depending on portfolio managers ’ instructions , orders ’ size , liquidity levels and market conditions , deciding where and how to implement investment ideas efficiently has never been more important for institutional traders than in the current market environment .
If not , what is the alternative ? Institutional traders need to have a high level of flexibility and agility for large tickets to navigate the high fragmentation of liquidity in the EU equity markets . Buyside traders typically use broker-driven smart order routers to access diverse execution venues like CLOBs , dark pools and systematic internalisers ’ quotes during
continuous market hours . They can also use a high-touch approach to trading blocks in different ways gain access to large pools of liquidity during the closing auction . All these execution venues and trading techniques are necessary and complementary for equity investors , and their relative importance can vary over time , depending again on portfolio managers ’ instructions , orders ’ size , liquidity levels and market conditions . The evolution towards agility and flexibility has clearly been supported by the new generation of order and execution management systems ( OEMS ). Real-time transaction cost analysis ( TCA ) within the OEMS allows buy-side traders to notice anything that might be going wrong during a trade in their system and discuss the execution process with their brokers .
Could a consolidated tape offer up a suitable alternative tool to CLOBs ( CT )? A like-for-like comparison between a consolidated tape for European equities and a CLOB is not really possible . A CT for European equities will likely give access to both consolidated pre- and post-trade data , and a CLOB only refers to pre-trade data . At this stage , there is also little clarity about the pre-trade format that the CT for European equities will eventually take : will it be a CLOB with five levels of order book data or simply the European best bid and offer ( EBBO )? Whatever form an EU consolidated tape would take for European equities , it ’ s important to keep in mind that the CT should primarily be a viable commercial proposition for all stakeholders , and it should also not be too costly for investors .
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