Whether market fragmentation is causing a liquidity crisis in Europe depends on who you ask. Buy-side players often lament the financial and operational cost that fragmentation is bringing down on them, but the sell side is keen to dispel their concerns as myth.
The debate was centre stage at this year’s FIX EMEA conference, as sell-side speakers assured the audience that fragmentation is less of a problem than people think – and that change is possible.
Alison Hollingshead, chief operating officer for investment management at Jupiter Asset
Management and the sole buy-side voice on the panel, told the audience: “There’s a lot of data we need and at the same time, we’re being asked to optimise our setup and control costs. The buy side is being asked to do more and more for less, and to really up our game and ensure that execution is a core component of the investment process.”
Determining where the actionable and addressable liquidity is in Europe should be a priority, she said. “We need to understand where the flow lives and where it’s traded.”
Addressable liquidity, that which can be interacted with on or off exchange, is increasingly difficult to measure as more venues and trading routes are introduced to the market.
Speaking to Global Trading after the event, Hollingshead added: “I think the problem is not that there is no liquidity, but how best to get things done and where.”
Admitting that there is room for improvement but arguing misrepresented data when it comes to addressable liquidity, Eleanor Beasley, EMEA head of market structure and COO at Goldman Sachs, hit back. “Liquidity in Europe is not perfect,” she acquiesced, “but it’s not
as bad as some say. Unlike the US, in Europe people aren’t looking at the whole pie. Less volume is happening on the lit market for many reasons, so if you only reference lit liquidity, you are underestimating what is really available.”
Also coming to the defence of the region, one sell-side panellist commented that Europe is, by nature, fragmented. “We need to stop apologising for that,” they urged. “The US is fragmented too, but not for geographical reasons – they wanted competition, to grow their market. What’s important is how you connect the dots, the layer you put on top to get market participants to choose to invest in you.”
Alex Dalley, head of European cash equities at Cboe Europe, was eager to bring up European markets’ performance in single-stock listings compared to the US.
Cboe’s European equities business took 24.6% of market share in Q4 2024, reporting an average daily notional value of €10.4 billion.
“Europe is actually much less fragmented than the US market in terms of how single stocks trade across the ecosystem,” Dalley continued, comparing AstraZeneca, a single stock on an interoperable cleared market in the EU, to Nvidia. The former has five options for lit trading venues, eight dark venues, six non-bank internalisers and 25 internalising brokers of meaningful size. The latter faces 17 lit venues, 30 alternative trading systems, eight single-dealer platforms and more than 100 systematic internalisers.
Fragmentation is more visible in whole portfolios in the EU, where domestic exchanges bring the total number to 30.
Considering post-trade processing, on an all-stocks basis, there are more than 20 settlement options – one per incumbent exchange, one or two more for ETFs, and two settlements per security, compared to just one settlement to a single CSD in the US.
“It’s not the degree of trading platform choice that is preventing Europe from being the biggest stock market,” he stated; although the whole-portfolio view illustrates that it is still a factor.
Dalley argued that the issues associated with fragmentation lie not in trading platform choice but in the complexity of how market data is purchased and post-trade processing.
From a buy-side perspective, Hollingshead shot back, “explaining where our volumes lead to reversion [prices moving away from their historical means] or higher toxicity levels [a high number of sub-optimal prices or bad fills] is really important.
“We need to be managing that, thinking about our impact, thinking about real market costs, about efficiency of settlement, and then also trying to take on board all these new ideas and innovations. Then we partner where adverse selection is limited.”
To truly address European market structure issues, significant innovation is needed – particularly around the lack of interoperability of clearing services. “We know where we
need to get,” said Simon Dove, head of liquidity at Instinet. “We’re talking about the same thing we talk about every year, but we need solutions. We need to be frank and honest with ourselves.”
“People calibrate how much they trade by how much it costs. If we innovate to bring costs down, people will trade more in Europe,” he added.
Market complexity is, in some cases, a byproduct of market evolution. “We can’t put the genie back in the bottle and return to how the market was years ago,” Beasley concluded. “We need to acknowledge that the market is evolving, participants have changed and new workflows have emerged. This isn’t necessarily a bad thing as long as we ensure standards remain high.”
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