Almost half of traders expect block trading to grow in Europe over the the next five years, and one in five expect that increase to be at least 50% according to a survey from the SIX Swiss Exchange.
The survey of equity, bond and other product traders found that 18% of respondents expect block trading volumes to grow more than 50% over the next five years. Only 9% expect a decline in volume with 43% expecting the market to remain stable. The survey had responses from 135 traders across Europe.
Broker ITG recently found that the total volume of electronic equity block trades in Europe rose from €20bn ($23bn) in the first quarter of last year to more than €40bn in the first three months of this year. Volumes were aggregated across Liquidnet, ITG Posit Alert, Turquoise Plato and Bats LIS.
Duncan Higgins, head of electronic products in Europe at ITG, told Markets Media that the shift to block trading has been taking place since 2012 as there is is a greater understanding of the cost of implementing orders and because venues are adapting to new approaches under MiFID II.
Under MiFID II, the new regulations covering European financial markets from January, broker crossing networks will shut down and brokers will not be able to cross client-to-client business in their systematic internalisers. There are also caps on the volumes of total trading in dark pools, although there are waivers for trades which are defined as large in scale.
SIX Swiss Exchange said traders seem to be taking advantage of the lack of a volume cap ahead of MiFID II’s implementation with 17% trading more actively and increasing the interaction with block sized liquidity.
European venues have been announcing innovations around electronic block trading for equities ahead of the new regulation. In April ITG added the ability for the sellside to post conditional orders for its institutional block crossing network, Posit Alert.
In February Euronext, the pan-European exchange operator, announced it would be launching Euronext Block, a multi-lateral trading facility for large-in-scale orders, in a strategic partnership with US fintech company AX Trading.The new Euronext offering is an electronic indication of interest service with sophisticated analytics for measuring best execution.
Rival pan-European exchange Bats Europe licensed technology from Bids Trading, the largest block trading ATS by volume in the US, to launch Bats LIS and asset managers now have direct access.
Last year Plato Partnership, the non-profit group, agreed a cooperation agreement with Turquoise, the multilateral trading facility majority-owned by the London Stock Exchange Group, to bring together the buyside, sellside and a trading venue and increase efficiencies in anonymous European equity block trading. Turquoise Plato Block Discovery set a new daily record on 24 May, 4% higher than the previous record set on 5 May 2017.
The SIX Swiss Exchange survey also found that 65% of respondents said increased regulation is the biggest hurdle for their business.
For example, Rebecca Healey, European market structure specialist at institutional block trading platform Liquidnet said in a blog that the opinion from the European Securities and Markets Authority last week on rules around trading on a trading venue has added more confusion and debate to the industry.
She continued that while the opinion relates to over the counter derivatives, Esma also reiterated the obligation for all instruments to be subject to pre-trade and post-trade transparency if they are admitted to trading on any MiFID II venue - a regulated market, multilateral trading facility, organised trading facility or systematic internaliser. Healey said: “Translation: if the instrument is listed on a European venue, MiFID II investment firms (both buy and sellside) are required to trade and transaction report, wherever they have traded across the globe.”
For OTC derivatives, only those contracts sharing the same reference data details as the derivatives traded on a trading venue are subject to the transparency requirements.
“The new Esma opinion will create challenges in deciding what needs to be reported by whom for those trading OTC derivatives,” said Healey. “If a narrow interpretation is not taken there is significant room for confusion.”
One fifth of traders in the SIX Swiss Exchange survey, 20%, also said the UK’s exit from the European Union, the global influence of the Chinese economy and competition was a concern.
The survey said: “This is very much echoed in the 52% of respondents who predicted their companies would begin to shrink their workforce over the next three years, with only 15% expecting workforces to grow.”