More democratic access, truly bespoke trading, and new asset classes about to emerge.

This was the picture painted for the future of Europe’s capital markets on a FIA EPTA-Eurex Group co-hosted webinar on December 2. The landscape is being transformed as a consequence of fundamental shifts in liquidity provision, the rise of automated trading, and a thirst for innovation.

And these changes have already disrupted the traditional buy-side/sell-side relationship and seen asset managers moving from liquidity takers to liquidity makers.  

The webinar was centred on the impact of Covid on liquidity provision in Europe’s capital markets, the structural shifts which are taking root and the implications for future market development.

It featured Robert Miller, Executive Consultant with Vanguard Asset Management, Mike Kuehnel CFO of Flow Traders,  Piebe Teeboom, Secretary General of FIA EPTA, and Jonas Ullman, COO of  EUREX. It follows a new research report written by Redlap Consulting and commissioned by FIA EPTA – which represents Europe’s market-making community – detailing alternative liquidity providers’ growing role and their embrace by the buy-side.

Contrary to what most expected at the time, panelists agreed the pandemic had actually opened the gates to a new wave of innovation. This was made possible by the adoption of electronic trading, an innate advantage for independent market makers who have seen their reach multiply. With capital markets drying up during the pandemic’s peak, these alternative liquidity providers earned themselves the buy-side’s trust by jumping in to keep the wheels of the finance going.

As a result, many capital allocators are now seeking to change their liquidity formation practices. Redlap’s survey shows 53% have already done so, a deep shift for an industry with entrenched habits. The rise of electronic trading and ETFs,  providing more price data for corporate bonds and price discovery, have helped cement these changes even as pandemic turmoil withdrew.

The webinar, which addressed last year’s liquidity turmoil, lessons learnt from the crisis, and the future of liquidity formation, became most animated when discussing ongoing technological innovations. 

Market participants shifting to electronic execution are harnessing a transparency not seen before. This is enabling all participants (retail and institutional) to understand what liquidity is available, where it resides, and how to engage with it. Innovation in alternative asset classes is contributing to the buy-side ownership of the order routing processes becoming truly agnostic. The future of liquidity formation will also include advances in pricing mechanisms – the traditional role of inventory vs liquidity premium/discounts – along with a growing use of ETFs in Fixed Income.

Further driven by a parallel rise in retail involvement, these developments are altering the market eco-structure. 

 The diversification of liquidity providers will continue to increase democratic access, leading up-and-coming challengers to improve offerings and prices. Panelists hoped these developments would change regulators’ approach from a more reactive approach to being one of a pro-active architect, enabling innovation and choice for end-investors.

Panelists reminded the audience that all have a role to play in engaging with regulators, ‘’to build the foundations of a forward-looking market architecture’’. Importantly, there is a need to demonstrate the industry’s positive impact in the lives of everyday European citizens who rely on firms for their pensions.   

The final portion of the talk was dedicated to the hopes panelists had for the future of capital markets. Opinions ranged from  embracing asset classes not yet in use to ever more transparent data for the buy-side. Some posited reduced frictions for capital mobility will increase retail participation, and illiquid assets today will become increasingly liquid through tokenization.

However, all agreed it was necessary to partner with policymakers and regulators to keep laws in line with the rapid pace of market innovation.  As summarized by one speaker: ‘’What I dream for the future is of a European capital market that truly achieves better outcomes for society and for the end investor. We are working towards a fully integrated single market for financial instruments and a shared consolidated tape.’’ Looking back ten years from now, panelists asserted 2020 – 2021 would be seen as pivotal years for liquidity provision, and as catalysts for renewed innovation in finance.