At Bloomberg HQ this week, industry experts gathered for a health check on market liquidity. Ben Smith, head of trading at Franchise Partners, joined TD Cowen’s head of European market structure James Baugh and M&G’s deputy head of equities dealing Dermot Dunphy, to explore the current liquidity challenges in Europe.
Of the numerous challenges to institutional execution at the moment, one of the first to be raised was the eternal issue of stamp duty reserve tax (SDRT) – currently calculated as 0.5% of the total value of the relevant asset, and collected at the time of transfer. While many hoped to see some tax relief on SDRT in the Chancellor’s Spring Budget last month, the industry was disappointed by its omission.
“When you look at stamp, from the get-go, you’re 50bps offside from where you want to be,” pointed out Dunphy.
There are ways of getting around SDRT, including by using contracts for difference (CFDs), which unlike traditional share dealing are not liable for SDRT as the buyer doesn’t take physical ownership of the underlying asset. However, many asset managers have their hands tied when it comes to loopholes like that. “Our clients are long-term holdings from pensions and so on – we can’t use CFDs or swaps,” pointed out Smith.
In addition, emphasised Dunphy, the real role of the investor is to direct the future of the company, and through this have a beneficial impact on the broader market. “As investors we are owners of companies – we buy shares to have a vote, and that’s efficient capital markets.”
“Foreign investors often overlook European markets,” noted moderator Deniz Besiroglu, market structure research associate at Bloomberg. “Now that Europe is relatively cheaper than the US, how can we improve optics?”
James Baugh addressed this issue, pointing out that while we’re in a challenging liquidity environment right now, overseas investors are not necessarily seeing the whole picture. “Intraday, lit books are where we see the challenge most acutely. They’re not getting the full liquidity opportunities available to them,” he noted. “In the US they have acess to the tape, access to liquidity that way. The question is how do we solve for that?”
The market has to to address this issue of transparency – which is an obvious tee-up for the question of the consolidated tape. “We can all argue for the pros and cons, but we’ve got to make our markets more transparent so that international investors can see the opportunities,” stressed Baugh.
Conversations around regulatory convergence versus divergence remain critically important. There are ongoing discussions around a single supervisory model for Europe, aligning with the UK and Switzerland with Europe for T+1, and this is all-important for optics. “Remember that to international clients, we’re all one thing,” noted Baugh. “A fragmented approach is not helpful.”
On the subject of a consolidated tape, Smith suggested that its introduction could be of material help with market outages – something we have seen a string of in recent months. “In Europe, there is no confidence to trade if the market goes down. In the US, trading continues. It would show Europe in a better light,” he said.
“A consolidated tape would make Europe look more sensible in it’s approach,” agreed Dunphy. “When I’m trading in the US and Canada I have a proper CT. In Europe, I have to put it together myself. A tape would show people that there’s a much bigger liquidity pool than when you first look at it.”
New innovations to improve execution also came up for discussion, with Smith noting that: “On the buy side we’re very conscious that it’s our brokers who bear the brunt of working innovation into their tech stack, and we’re grateful for that.”
New functionalities name-checked included new closing mechanisms from the Swiss to bring back liquidity, Cboe’s changes to periodic auctions, and venues collaborating with the buy-side to help them understand nuance and assist them to ask the right questions of their brokers.
Smart markets such as Intelligent Cross and One Chronos were also referenced, although the panel was split on their benefits, with some warning that these new platform might split liquidity yet further, while others praised the added functionality and protection for the buy-side. [Ed – Watch out for our feature in the upcoming edition of Global Trading Magazine Q1 for a deeper exploration into the new wave of smart platforms).
“It’s a dichotomy of further fragmentation, but innovation will help the end investors if we can bring costs down for clients. We should be proud in Europe that we’ve been leading the way in periodic auctions,” said Dunphy.
In conclusion, Baugh raised the complex issue of liquidity interaction, and how to adjust for it.
“With liquidity shortfall and more business done on a bilateral basis and pulled out of the public markets, we’ve got ourselves in a bit of a juxtaposition. Being thoughtful about liquidity interaction, we do see some performance degradation in different liquidity channels. There is a dilution effect,” he noted. “We have to think about how we interact with different venues, and we have to adjust.”
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