Five market structure topics to watch in 2024

Natan Tiefenbrun
January 31, 2024

Natan Tiefenbrun, President for North American and European Equities at Cboe, discusses five key trends for European market structure in 2024, including the growing importance of the retail investor and consolidated tapes in the EU and UK moving a step closer to reality.

Consolidated tapes move closer to reality

The EU and UK have committed to introducing consolidated tapes (CT) for equities. In 2024, the timetable for their introduction will become clearer, as will the criteria by which ESMA and the UK’s FCA will determine who should be awarded the contract and rights to operate the CT. 

Influenced by Cboe and a coalition of buy- and sell-side firms, the EU has reached a political agreement to introduce a real-time pre- and post-trade consolidated tape as part of the Mifir review. Now the onus is on ESMA to set out more technical details, including what exactly constitutes ‘real-time’, the workings of the selection and authorisation process for the tape (which will in turn determine the governance model and pricing to consumers), and the revenue sharing model for data contributors. 

Most importantly, ESMA needs to attract bidders to compete against EuroCTP, an entity owned by a consortium of national exchanges that fought against the introduction of a CT in the first place. ESMA must attract and select a provider committed to a governance framework that gives consumers a voice and provides a reasonably price tape that enables broad adoption of the CT.

Focus on the retail investor

The (partly national) fragmentation of European retail activity across shares, ETFs, CFDs, exchange-traded derivatives and structured products is one reason why the region’s capital markets have trailed other developed markets in terms of liquidity and volumes over the past decade. Policy makers are looking to enhance retail participation by driving greater harmonisation and by enhancing investor protection, but there are many unanswered questions.

Will the EU-wide ban on payment for order flow – being enforced from 2026 – drive retail liquidity on-exchange? Will restrictions on CFD trading, including limits on leverage, encourage customers towards competitively quoted exchange-traded derivatives and/or towards issuer-supported securitised derivatives? Can the operational complexities and costs associated with ETFs, especially in the post-trade arena, be sufficiently simplified to ignite the growth witnessed in other regions?  

To answer these questions, Cboe is working with partners to bring greater efficiencies to Europe’s trading and post-trade architecture, including the recent launch of single stock options trading on Cboe Europe Derivatives (CEDX), replicating into equity derivatives many of the ingredients – pan-European coverage, a more efficient post-trade structure and lower costs – that contributed to our success in equities. 

Attracting trading back to continuous hours

With overall volumes subdued, the longstanding drift towards closing auctions took another leap during 2023. Despite high fees charged by exchanges, closing sessions accounted for 28% of all on-exchange activity in both July and September – all-time highs. With incumbents losing volumes outside of these auctions, Cboe’s share of intra-day trading is now larger than that of the listing venues across indices including the UK100, UK250 and FR40.

Against this backdrop, brokers are focussing on how to most effectively source intraday liquidity for clients. Firstly, a growing number are recognising that continuous lit books are not homogeneous; Cboe’s focus on maximising the certainty and time to fill for client limit orders, opportunities for price improvement through thoughtful integration to other books, and a more attractive and egalitarian fee structure – continue to contribute to our growth. 

Secondly, brokers are evolving their smart order routing (SOR) logic to integrate new sources of liquidity with increasing sophistication. Rather than squeeze them in to a dark routing phase, SOR logic is now being specifically designed to use periodic auctions for passive liquidity and spread capture, and to step away from the high-speed dynamics of continuous books. 

Keeping post-trade markets competitive

Keeping Europe’s post-trade environment competitive will be another big theme of 2024. Where incumbents may seek to limit or remove existing interoperability arrangements, Cboe will defend and seek to extend the competitive clearing framework so as to drive down costs for participants.

Cboe Europe is committed to user-choice in clearing, while the principles of open access also underpin Cboe Clear Europe – our pan-European clearing house. The benefits of competitive clearing in equities are undisputed across the industry and is something we see reflected through the increased adoption of Cboe Clear’s services within the “default/preferred” clearing model operated by Euronext. Whilst we will push for new exchanges to support this default/preferred model, the ultimate goal remains true choice for participants via interoperable clearing. The UK and Europe will also face pressure to align its settlement cycles with other regions, a step that needs to be given careful consideration.

Reviving Europe’s listings markets

By almost every metric Europe’s listings markets are underperforming, and every week seems to be another headline about a company choosing to list in the US. This is damaging for Europe’s capital markets, discourages investment in the region and is having a knock-on effect on liquidity in secondary markets. 

Regulators are already trying to improve the situation, with an adjustment to listings rules in the UK designed to attract more companies to list in their home market. At Cboe, we believe we can catalyse change through our recently announced Global Listings initiative, a first-of-its-kind global listings network which will include the introduction of corporate listings capabilities in the UK and Europe during 2024. Our ultimate goal is to enable corporate and ETF listings across all our global exchanges and provide a seamless ‘intra-listing’ experience, encouraging European companies to list first in their domestic market, with an easy route to greater international exposure at a time of their choosing.

This article was originally published in The TRADE, here.