Wider geopolitical uncertainty, ‘higher rates for longer’, rising oil prices, weakness in European markets, and the AI-fuelled rally finally running out of steam saw markets turn downward in August and September.
According to Liquidnet’s Q3 2023 Liquidity Landscape: Moving on from MiFID report, other wider regulatory concerns and pressures include The Financial Services and Markets Act in the UK, and the European Parliament vote on the proposed amendments to MiFID in December/January, coming into force in March 2024, as well as the introduction of the consolidated in tape in both Europe and the UK, the cost of data and the need to shore up capital markets.
A regulatory focus on technology comes at a time where pressure to further automate and optimise resources, and to increase multi-asset trading, is hamstrung by a wider lack of clarity, the report found. Additionally, the move to reduced settlement cycles — with US implementation of T+1 occurring in just over six months’ time has highlighted whether any regulatory action is needed to smooth the impact of the move in the US for EU market participants.
Despite these wider geopolitical and regulatory concerns, the industry continues to move away from the traditional market set-up of buyers and sellers meeting on a primary exchange, the report outlined.
In Q3 2023, the European equity market averaged €42.1 billion in daily turnover, a decline of 13% from the second quarter’s average of €48.3 billion. July, August, and September all saw their lowest average daily turnover since the Covid-era summer of 2020 as markets confronted broader economic uncertainty. The report suggests the shift in volume away from lit markets appears increasingly persistent.
Despite the introduction of MiFID II, European volumes on primary venues is now just 30% of market activity, the report found, leading to concerns around the volume of activity traded away from the lit. Reduced overall continuous activity results in clear outcomes to protect end investors: a stronger reliance on technology to source and generate liquidity; and the need to trade in size in the dark.
Reliance on broker capital for certainty of execution is also becoming entrenched as volumes continue to rise, all of which leads to the resurgence of core regulatory concerns; lack of continuous lit trading to support primary capital markets; perceived lack of transparency in secondary market activity; and growing industry resilience on use of technology and third-party providers reliant on cloud.
The share of flow in the continuous lit primary session increased slightly from the second quarter’s average of 30% to a monthly average of 31.8%. In terms of overall continuous lit activity, this uptick was overshadowed by a notable decline in Lit MTF market share over the previous two quarters.
In the third quarter, closing auction activity consolidated around the new heights it achieved in the second, averaging 27.2% of overall lit market activity. The closing auction’s growing relevance to price discovery is in itself an incentive for many to participate. However, as market share of the close grows, network effects around its liquidity will grow as well, further incentivising participation.
Volatilities across the major indices continued their downward trajectory, reaching multi-year lows in late August not seen since the summer of 2021. Spreads remained stable and range-bound, inching up slightly as the market began to turn downwards and volatilities started to rise toward the back half of September.
Dark market volumes remained stable during Q3, again oscillating within their historic range of 9-11% of overall market activity and continuing to reaffirm the long-term stability of dark market share, despite the historic and ongoing regulatory headwinds.
The overall size of the dark market fell during the third quarter, in line with overall market volumes. Daily dark volumes averaged US$3.3 billion in July, US$2.8 billion in August, and US$3.5 billion in September, down year-over-year and generally in line with the levels seen in 2021 and 2020.
© Markets Media Europe 2023
