WHERE EQUITIES LEAD.
Will the changes in equities trading venues be mirrored in other asset classes, as the regulatory push to trade on-exchange continues?
Quite likely, thinks Ronan Ryan, chief strategy officer at IEX in the US. “We’ve already seen that happen in fixed income. Equities is the litmus test, the first to electronify, for example, and then the others follow suit. The same may be true of fragmentation. It’s learnt behaviour. In the same way, people also see what worked in US equities and what didn’t. The US is the front runner, just like equities is for other asset classes.”
The model may not necessarily be the same though, insist others. Other asset classes often need a totally different approach. Fixed income, for example, shouldn’t be a clone of the equities market structure but allowed to develop and grow in its own form. One observer comments: “In fixed income, the number of different bonds is far greater than the number of stocks. Liquidity is inversely related, so you have a larger number of bonds traded far less frequently. That doesn’t fit the lit exchange model. The whole ethos of how the trading works is different.”
There is also a growing number of competing exchanges in the derivatives space, given the current drive towards futurisation and OTC clearing. In the FX arena, award-winning LMAX has developed as leading MTF for global FX trading with clients in over 80 countries.
Multi-asset class trading may well be the way forward. The market has seen several recent acquisitions by equities trading platforms of venues in other asset classes. BATS Chi-X recently acquired Hotspot FX and ITG bought RFQ-hub, a multi-asset platform for global listed and OTC derivatives. Liquidnet, the buyside to buyside block crossing network, acquired bond trading platform Vega-Chi in March 2014.
Per Lovén, head of international corporate strategy, Liquidnet, explains, “A solution was needed to unlock liquidity in the bond market and we are looking at providing one, utilising our buyside blocks trading model. We’ve been consulting with our members, scoping out the liquidity opportunities, and have made a lot of progress in the last 12 months. The end goal is a multi-asset front end trading application for our members. We’ve found we have a lot of momentum. People know the platform and the technology and we’re creating solutions based on our existing know-how and relationships.”
Keeping it creative
As MiFID II looms, some point to a degree of denial on both the buy and sellside as to the enormity of what lies ahead. Others counter that, until the final content of the new directive is published at the end of 2015, no scenarios are set in stone: it’s understandable if some market participants are wary of launching a new MTF or exchange until the future becomes clearer.
Will the new regulations reverse the benefits of MiFID I, taking the market back to centralised exchanges and limited choice? Some rationalisation is probably inevitable at some point, given the impact of new technology and the drive towards transparency. But the market has a phenomenal capacity to reinvent itself, no matter what the regulators throw at it.
“Rumours of the death of dark pools are greatly exaggerated,” says one broker. Faced with MiFID II’s insistence on 4% and 8% caps on dark trading, new alternative venues offering ground-breaking new products will continue to emerge, as existing incumbents and new players jostle for position. With the buyside now firmly in the driving seat, asset managers will be increasingly analytical about choice of venues and the costs and impact of trading. That means improvements on the value side and, in the case of the best venues, consistent quality emerging in terms of content and execution. In the words of one asset manager, “it’s all up for grabs.”