European equity markets averaged €53.4 billion in daily value transacted in the first quarter, down 3.3% over the 2022 average of €55.2 billion, according to Liquidnet’s latest report – Q1 2023: GFC 08 Redux.
The report showed that volumes rose notably throughout the quarter, reaching nearly €60 billion with March being the fourth most active month since the onset of Covid-19 in Q1 2020.
This is not surprising given the turmoil in the banking sector. in the first three months.
The year may have begun muted but volatility returned to European equity markets in March after the collapse of Silicon Valley Bank and the government engineered sales of Credit Suisse to UBS.
However, the turmoil was not as bad – rebounding to only half of the highest levels seen during of the heat of last year’s interest-rate driven sell-offs, This was because contagion did not spread to the broader banking market as feared.
The report said this will remain an important factor to watch as higher volatility typically translates into higher trading costs.
It showed that the costs of trading in the Euro STOXX 50 rose 45% from lows at the end of January to a peak in late March.
This mirrored increases over a similar period in the CAC40 (+35%), the DAX (+20%), and the FTSE (+33.5%).
Other challenges were found in the continuous lit market. The report said despite regulatory efforts, activity remains in overall decline—averaging 55% of total volume in Q1 versus 66% in Q1 2018.
It found that options on where to source liquidity from alternative venues continue to fluctuate.
Systematic internalisers, for example, retained their usual seasonality, comprising 17% of total European volume in March and matching year-over-year expectations.
There was a small increase in primary lit for the quarter, which ticked up to an average of 38%, although it remains to be seen if the seasonal rise over recent years may be is temporary, driven by major geopolitical and economic events, such as Covid-19 and the Russian invasion of Ukraine, which occurred in the first quarters of 2020 and 2022, respectively.
The report also noted that average monthly closing auction volume continued its upward climb, reaching 23% of all combined lit and auction volume during the quarter, up from 21% over the previous three years.
It said “rising volume at the close will continue to suck volume from continuous intraday trading given that market participants need to participate in the close and as a result will continue to increase their levels of participation.”
Liquidnet added that periodic auctions are also solidifying their place in the European market structure, consolidating at a consistent month-on-month market share.
As for the large-in-scale segment, the average was 34% of the overall dark market during the quarter.
LIS volumes as a percentage of the dark market have trended down throughout 2022 and into Q1 2023 relative to their peak in 2021 and late 2019.
The drop in LIS volumes was also reflected in a similar decline in overall dark execution size over the same period.
The report noted that over the past few years, a gap has emerged between the UK and other EU markets, with UK dark execution sizes settling 27% lower than those in the EU in March 2023.
This is mainly due to the divergence in regulatory regimes post-Brexit and the removal in the UK of the double volume cap.
“A short-term spike in volatility during March led to increased volumes, however Q1 on the whole was a continuation of the current situation facing European equity markets,” says Gareth Exton, head of execution & quantitative services EMEA at Liquidnet.
He adds, “Suppressed investor appetite for the region meant execution sizes were smaller, large conviction trades were in short supply and the block market continued to fall as a proportion of the dark market.
While activity is suppressed, controlling execution costs remains at the forefront of traders’ minds, so methods of execution that limit market impact such as SIs and the closing auction saw increased activity.”
He notes that while the dark market is in ESMA’s sight for the MiFIR review, with Reference Price Waiver proposals and changes to the double volume cap, analysis shows this could have a significant impact on what is approximately 9-10% of on exchange volume.
Where will this flow go is the obvious question, with Period Auctions – or Frequent Batch Auctions as they are also known – looking the likely beneficiary.”
©Markets Media Europe 2023
