By Massimiliano Dobner, Brokerage & Execution, Market Hub – IMI Corporate & Investment Banking Division, Intesa Sanpaolo
What has the liquidity landscape looked like in equities this year?
2023 was a very peculiar year for equities. It started with very cautious expectations and analysts seeing an increase in downside risks, but instead it turned out to be much better than expected, with main global indexes recording positive performances. Despite this, volumes recorded a decline year-on-year: in Europe the monthly ADV at 60-65bn is closer to the values seen in 2021 than to those in 2022, the year in which tensions in the East (particularly in Q1 and Q2) and the outbreak of the Ukrainian war had heavily impacted trade.
Some interesting changes also occurred in European market infrastructure, with volumes on SI and on OTC increasing to around 20% of the total, in comparison to previous year, with the effect of more market liquidity fragmentation. A growing interest by investors was seen also in the closing auctions on the lit markets, with record volumes of over 15% of the total flow in recent months. The role of the traditional lit markets (out of auctions) however remains predominant, even though there was a slight decline to around 35% of total volume. The rest of the equity market share was shared among periodic auctions, dark pools, and off-book. The European situation mirrors what has been seen overseas with volumes decreasing by 7-8% compared to the previous year, after a particularly eventful Q1 due to the Silicon Valley Bank crisis and off-exchange liquidity continuing to trend upwards at around 45% of total equity market volumes.
What are the liquidity challenges across Europe, and how is your desk handling these?
The fragmentation of the liquidity pools following the introduction of MiFID has certainly created a multitude of solutions that have made it more difficult, for market players, to have access to all of the sources, and therefore made it more complicated for brokers to provide the best possible trading options for their customers. Another trend, in which we were active participants, was the growth of retail customer order flow. Recently, particularly post-Covid and the introduction of the controversial payment for order flow models, the market has responded to the increase in interest from retail customers with new customised solutions, even in 2023.
The different characteristics from country to country also make for a varied European context, with a variety of micro-structures and market players with different requirements. In Italy and Germany, for example, a very important share of liquidity comes from retail investors, even though in Italy the primary market remains the most utilised (also because of Tobin Tax), while Germany has increasingly relied on the single/multi market maker models.
I think the most important challenge brokers are facing is directly linked to the constant launch of new liquidity pools, that may not only reshape market landscape with the risk of ever more fragmentation and higher implementation/adhesion costs, but restrict access only to very few global players. The Market Hub brokerage team has always been very focused on new market developments and we are dedicated to reviewing our best execution policy annually, to remain highly competitive and compliant with regulatory changes. With this in mind, and while keeping a focus on Italian domestic market, we consider the recent merger between Borsa Italiana and Euronext as a step forward to create a hub that might help to aggregate liquidity in the European equity market.
What impact is the changing rates/inflation environment having on your clients trading strategy?
As a broker with a strong footprint on retail business, we see a direct impact of this changing macroeconomic scenario through customer behaviour. The leap in inflation and the consequent, sudden increase in interest rates has most importantly led to a switch of assets preferred by retail size orders flow, with volumes on fixed income recording a three-digit increase in 2023 thanks to attractive returns, while overall volumes in equities has decreased. If we want to focus more specifically, we assisted in the rush of interest in artificial intelligence (AI) that has helped fuel technology stocks, in particular on the US market, while in Europe the interest has concentrated on retailers, media, and the banking sector with balance sheets that benefited from sharply increasing interest margins.
Also, given the recent developments in the Middle East, we may expect greater caution from investors towards equities in the next future, particularly with regards to growth stocks which are most affected by the impact of high rates, even though it will depend on how long the main economies’ resilience will last. It should be noted, however, that in Europe the P/E remains on an attractive valuation and various European sectors trade at a discount compared to comparable US sectors, which could be a driving force for future asset allocation decisions.
How are algos helping you to source liquidity in the current environment?
In an environment that sees an ever-wider fragmentation, with greater expectations of speed and demand for the best possible execution, the use of algorithms over time has become essential. At Market Hub, we have developed algos that are reviewed annually with the aim of guaranteeing the best possible execution for our customers. Even algorithms that have been in existence for years, such as volume weighted average price or time weighted average price and volume have evolved to ensure a better trading performance, navigating all of the execution venues along with customised smart order routing, offering significant advantages and outperforming alternative options.
What do you expect from 2024 in respect of equity market liquidity, and what is on your horizon for the coming year?
In 2024 we expect major challenges for investors coming from the peak in inflation, the rise in rates, the real estate crisis in China, the war in the Eastern Europe, tensions in the Middle East, the status of developed economies and the American elections in November 2024. In addition to all this, it’s important to consider the settlement change to T+1 that will occur first in the US, at end of Q1 2024, which will most likely be adopted in UK and Europe as well in the near future.
Our goal, as brokers, is to be a point of reference for our customers by reducing their operational complexity, offering a high level execution service and the most efficient and innovative technological solutions. We are also considerate of the difference between high-touch and low-touch customer order execution, typology and the size of the orders and a high level of integration in multi-asset trading.
©Markets Media Europe 2024
