Which market structure changes will impact the buy-side most heavily and how will they navigate it?
The ongoing fragmentation of liquidity and the emergence of new platforms continue to drive innovation. That innovation is outpacing the regulatory framework. Regulators around the globe are striving to keep pace. In the US, the SEC has responded by issuing a slew of proposals to address various aspects of the market – from heightened disclosure requirements, buy-backs, settlement cycles, short-interest, security-based swap reporting, etc.
In response, the buy-side needs to be proactive and engaged with regulators and industry groups to highlight any unintended impact of any new rules which may harm our clients access to liquidity. Operationally, each new rules represents a unique impact on the market. Taken together, this confluence of new rules and potentially inconsistent regimes around the globe will require buy-side players to stand up cross functional teams to implement and monitor their compliance.
How do you expect regulatory divergence post-Brexit to impact the markets and how can trading desks adapt their strategies to this?
We are seeing evidence of how the different regulatory and competition authorities are diverging with potential impact on market accessibility and liquidity. That said, there remain areas of common interest, and recent geopolitical events appear to have aligned regimes more closely as they seek to maintain relative attractiveness for market participants. We will analyse the potential impact and represent our views, on behalf of our clients. Our hope is that the dialogue between regulators that already exists can be maintained or even extended with the goal of efficient markets and enhanced liquidity remaining at the forefront of their thinking.
We welcome the focus on a consolidated tape, as this will provide greater transparency for market participants, a much cleaner dataset for post-trade analysis, and will allow for addressable volumes to be more clearly defined. As ever, it is down to our regional trading teams to navigate market structure developments and deliver the best outcome for our clients.
What remains the final piece of the puzzle for institutional adoption of cryptocurrency trading?
If only there were a final piece of the puzzle. I think there are still several pieces that need to fall into place for true institutional adoption of cryptocurrency investment.
First, and probably most importantly, regulatory clarity is required. The ongoing ambivalence from major regulators doesn’t seem likely to continue indefinitely. That said, we have yet to see a definitive regulatory model for this asset class. Recent announcements from the UK and US point to folks working hard on this issue but clearly this is a complex topic that will require a deft hand to meet regulators stated objectives of retail protection and money laundering enforcement.
Second, market data is a mess. Fragmented exchanges operating a variety of protocols and experiencing issues with outages, data quality and accountability. In theory, some aspects of blockchain should make markets more transparent but in practice the evolving matrix of exchanges and opaque derivative products makes institutional quality trading and best execution a fascinating, but very solvable, challenge.
Finally, the area where there appears to be most progress is the institutional operational capabilities, especially custody. This is not an issue for retail investors, where self-custody or co-mingled exchange custody is acceptable, but institutions require asset segregation and security at a significantly higher standard. Lots of very smart people are working hard to provide solutions to these pain points. None of them are insurmountable and I am optimistic that we will continue to see the barriers to institutional adoption fall.
How have you adapted your trading portfolio in light of the rise of index/passive investment?
The biggest impact of passive investment strategies has undoubtedly been the migration of liquidity towards the closing auction. As a trading desk at an active asset manager, we respond to liquidity opportunities whenever they occur, and we are interacting with the closing auction in an opportunistic way and will source extra liquidity if the uncross price looks favorable.
Another impact of the rise in passive/index investment is the lack of turnover/liquidity in some of the index heavy names. Index holders generally don’t sell their holdings unless there is a rebalance event and therefore the available float in these names tends to be lower than what is indicated.
What is the impact of the growing retail segment on institutional investors and how have you adapted your strategies to adapt to this?
In Europe, retail remains a small part of the liquidity landscape (7-10%) relative to the US (20%) and it can be difficult to interact with this liquidity directly. There are various mechanisms being developed to make European retail volumes more accessible to institutional investors, and we remain alert to all new initiatives that would enable us to source unique liquidity for our clients.
Overall, institutional investors would prefer to engage with the growing retail liquidity. At times, the retails flows can represent “inaccessible liquidity” so getting a better understanding of true retail activity would allow institutions to manage their liquidity consumption more accurately. Additionally, retail activity can create undue volatility forcing institutions to consider whether price dislocations are real or transitory.