Regulation and liquidity are key themes driving the trading trends.
This article first appeared on Best Execution, a Markets Media Group publication.
The buy-side is relying less on algo usage, while US bulge bracket firms are grabbing market share, according to the latest European Equity Trading Survey from Bloomberg Intelligence. Liquidity and regulation remain top-of-mind topics, while concerns increase around cyber-security and AI. BEST EXECUTION sat down with market structure analyst Nicholas Phillips to discuss the results in detail.
The second annual European Equity Trading Survey from Bloomberg Intelligence, seen by BEST EXECUTION, reveals that European buy-side traders cut their use of algorithmic providers by 43% in 2023, driven by a notable decrease from small fund providers.
The survey, conducted by Bloomberg’s market structure team and headed up by Larry Tabb, covered 87 buy-side heads and senior European and UK traders with a majority of traditional asset managers, along with 17% hedge funds. This year, respondents were tilted slightly more toward Europe, with 43% domiciled on the continent, 33% in the UK, 16% in the US (but trading in Europe) and 8% in Switzerland.
Liquidity landscape
“Two key themes were liquidity and regulation,” said Nicholas Phillips, market structure analyst with Bloomberg Intelligence and co-author of the study, which was released on the Bloomberg Terminal only. “Especially the divergence between the UK and ESMA – this was a big issue. Liquidity also kept coming up over and over again in conversations, particularly around how buy-side traders are struggling to facilitate their flow.
“Mifid II was a gift and a curse. It increased competition but by doing so, it split liquidity flow – which is now here, there and everywhere across multiple venues. The consolidated tape was of course another hot topic – a large portion of the buy-side traders believe that a tape will help to improve liquidity in Europe. One of the big drivers of this is market participants outside Europe – they are seeing it as too difficult right now, because it’s so fragmented. Having a tape would shine a light on that.”
One buy-side trader compared the lack of a tape to competitive fishing – if you see that everyone is at one end of the pond and you’re at the other, then you’re probably best off moving to that side of the pond.
“IF YOU SEE THAT EVERYONE IS AT ONE END OF THE POND AND YOU’RE AT THE OTHER, THEN YOU’RE PROBABLY BEST OFF MOVING TO THAT SIDE OF THE POND.”
Another key topic was the UK reversal of the Mifid II unbundling rules, due to take effect next year. “The common consensus amongst buy-side traders is that they would prefer to remain unbundled,” said Phillips. “It gives them the freedom and the flexibility to focus on the best solution and decide who they want to trade with. I think the genie is rather out of the bottle by now when it comes to going back to bundled research.”
Falling algo usage
European buyside traders cut the use of algorithmic providers by 43% to a three-year low, found the survey. On average, European investors cut their number of brokers from 6.5 to 3.7 – although this was entirely driven by smaller funds, which sliced providers by 48% in 2023. Large investors have kept their stable of algo brokers fairly constant over the past three years at around 8.7, while midsize brokers increased to 6.4 from 5.5.
“Though smaller brokers cut in 2023, they ramped up their providers list last year by 50%, so this year’s downward move brings them more in line with 2021,” said contributing analyst Deniz Besiroglu. However, traders overall expect algo usage to increase again in 2024, particularly among smaller funds, whose traders expect their algorithm use to increase by 34% next year.
JPMorgan was the most commonly used algorithmic trading desk in Europe, capturing 12% of market share: followed by Morgan Stanley (10%), Goldman Sachs (9%) and Bank of America (8%). Overall, however, US bulge bracket firms grabbed a third of EU algo share, while electronic algo providers Virtu, Instinet and Liquidnet captured 17% and, combined, are the second most commonly used cohort in Europe. European bulge-bracket banks only captured 11% of market share, two percentage points behind the merged share of Jefferies, Cowen and Citi’s algorithmic trading desks. UBS ranked as the largest algorithmic trading desk among European banks, with over 7% of market share, and is likely to improve its market position after the merger with Credit Suisse.
Ambivalence over algo-wheels
Buy-side traders are using a combination of benchmarking tools to effectively assess execution quality, found the survey, with 73% relying on the market-on-close price (MoC) as a performance gauge for up to 25% of executed trades. “Closing auctions in Europe make up over 25% of lit order book volume and are more frequently used by traders to solve for fragmented liquidity,” said Besiroglu. “The arrival price is the second-most popular benchmarking tool we observed, as 46% of firms used it for the final 25% of their trades.”
‘CLOSING AUCTIONS IN EUROPE MAKE UP OVER 25% OF LIT ORDER BOOK VOLUME AND ARE MORE FREQUENTLY USED BY TRADERS TO SOLVE FOR FRAGMENTED LIQUIDITY.”
Most (54%) of the larger buy-side firms use algo-wheels to route flow, compared to 29% of mid-size and 32% of smaller funds, with most routing to a max of five providers. Virtu and Bloomberg each captured 29% of market share in Europe, followed by Flextrade (19%). However, a “substantial group” of buy-siders still question the wheels’ effectiveness, with concerns revolving around whether the wheel runs on adequate and accurate data sets.
O/EMS evolution
Bloomberg’s TOMS ranked as the most frequently OMS in Europe, predominantly among small firms. State Street’s Charles River ranks second (17%) and is the most popular for midsize firms. “Europe’s OMS market remains splintered, with many smaller players making up around 20% of it,” said the report.
Bloomberg’s EMSX is the most-used execution-management system (EMS) in Europe, particularly in small (53%) and midsize firms (46%). Virtu, Newport and Bloomberg each hold 21% of market share among large firms.
EMS and OMS providers are rarely changed, the study found, with only 8% of the former and 15% of the latter changing their systems since 2020. “These systems are extensively customized and integrated to fit in with a firm’s trading infrastructure, which raises the barriers to switching to a different provider,” said the survey. “Such a move requires extensive investment and time, as traders need to be trained to use a new system.”
Finally, cybersecurity ranks as an important priority for traders as data breaches remain common, but it’s more of a concern in the US than Europe. AI is still a hot topic among traders, with the lack of regulatory frameworks posing a concern.
