EUROPE: AFME – Understanding the Liquidity Landscape in European Equity Markets

Wednesday July 8 2020

On 06^th July 2020, the Association for Financial Markets in Europe (AFME) published a paper on Understanding the Liquidity Landscape in European Equity Markets. This paper aims to contribute to this evidence-based analysis and set out AFME’s understanding of the liquidity landscape in the European equity markets.

Key Findings

• The relatively low volume of risk-intermediated trading activity on systematic internalisers is not substitutable by other non-intermediated trading , and it would not migrate to a continuous lit order book trading if systematic internalisers were not providing risk-intermediation for some of their trading with their pension and investment fund clients. This trading activity does not impact the quality of the price formation process in Europe post MiFID II and is subject to strict post-trade transparency obligations, as any other trading activity.
• Amongst the trading volumes traded on-venue, 8% is non-displayed. Non-displayed liquidity traded on venue also serves the needs of pension and investment funds by enabling firms to manage their clients’ implicit costs by reducing market impact. Itis capped by law at 8% of the total trading. This trading activity run by trading venues is also subject to strict post-trade transparency obligations.
• The various ways of trading across existing execution venues all serve different functions and market needs. No trading modality is superior to others. Investors of all natures have different objectives and strategies. Continuous lit order book trading is valuable but not interchangeable with banks’ systematic internaliser risk-intermediated trading, which plays a critical role for pension and investment funds. Pensioners and savers would be worse-off if diversity of ways of trading is curtailed.
• A suboptimal trade reporting framework, with insufficient identification and flagging of the different trade categories, including of those that are only technical trades, increases the complexity of the European equity markets structure that otherwise would be easier to understand and better placed to serve the interests of end users.

Key Recommendations

• AFME commends ESMA, National Competent Authorities and policy makers for the continued work to improve the quality and completeness of data. AFME remains committed to help in this difficult, yet critical task by responding to questionnaires on how to improve post trade transparency reporting, by actively participating on data workshops organised by European and national regulators and by making this data analysis public.
• AFME supports ESMA’s data strategy which could be underpinned by the setting up of a consultative working group to ESMA’s Data Standing Committee. More broadly, AFME supports a more formalised, more inclusive public industry wide forum to leverage from market participants’ experience and contribution to improve data quality and availability.
• AFME recommends that further work on improving data should be prioritised before considering more substantial changes to the EU transparency framework so soon after MiFID II implementation.

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