By Bob Cioffi, Global Head of Equities Product Management, ION
The equities trading landscape has taken a dynamic turn over the past few years. While the continued dominance of low-touch, algorithmic trading has accelerated the speed of activity, the rise of alternative trading venues worldwide has unlocked a wider range of options and opportunities.
Firms are feeling the pressure as a result. While buy-side businesses jostle for access to as many markets as possible to avoid missing out on liquidity, sell-side firms are competing to help deliver on those ambitions. However, both are struggling to keep up with the pace of change.
The market needs more agility and connectivity to manage greater volumes and demands. But the question of who takes ownership for this innovation – and bears the cost – is more complex. With more market players than ever before, firms, venues, and technology providers need to work out how to share this burden to reap the collective benefit.
New competitive dynamics
Across the equities market, choice and competition among trading venues is ramping up.
New, alternative trading venues have been challenging traditional exchanges for some time. Both are experimenting with new functionalities and order books – auction, dark, lit, and conditional – to differentiate themselves as the go-to platform for clients. In Europe, the London Stock Exchange (LSE) acquired Turquoise to draw liquidity back in response to post-MiFID liquidity fragmentation, while Euronext has grown by acquiring exchanges in Dublin, Oslo, and Milan.
Less typical market players have also entered the fray to challenge the primary exchanges. These range from banks creating their own trading venues, such as UBS’ MTF and Goldman Sachs’ MTF (SIGMA X), to brand new exchanges such as Artex, which offers tokenized art funds as a new investment opportunity and allows museums to trade digital asset securities like equities. The rapid growth of IntelligentCross, an alternative trading system (ATS) is another good example.
In a fragmented landscape where multiple venues offer free market data and connectivity with prominent liquidity providers, horizontal differentiation – exchanges offering different types of products or services to cater to different market segments – is increasingly common. We are at a point where no single venue can serve the interests of all investors.
Pressure on the system
It’s common for firms to want to “try before they buy” with access to new venues in the market. But building the technology to create fast access in this way is costly – both in time and resources.
For sell-side businesses to deliver best execution for their clients, the cost of connecting to every available venue currently outweighs the benefits. This leads most to opt for selective connections and rely on broker services. For buy-side firms and end-users deciding which markets they would like to access and how, these different approaches to connectivity will continue to shape their decisions, especially as different types of trading venues evolve. Naturally, technology providers are under pressure from all angles to build and monetize a new era of market infrastructure: solutions that can support connectivity to new venues, and therefore help all parties achieve their goals.
As a rule, greater competition is an economic good. It moves the market forward, breeds innovation, and results in lower costs. But key industry questions – such as who should take the lead in modernising market infrastructure to meet abundant modern connectivity needs – make reaching a verdict more difficult.
Addressing the challenge
As venues and order types grow in number, the degree of overhead in today’s market is significant – and the pace of change is fast. The question is how the market can innovate to keep up at a time of such rapid development.
Traditional processes for securing connectivity such as the manual configuration of connections and the lengthy onboarding of new clients are no longer quick or adequately responsive to meet needs. Technology firms need a way to work with new venues and exchanges to meet the needs of market participants.
At the same time, the growing trend of consolidation across exchanges in terms of ownership – for instance, the widespread adoption of Nasdaq’s technology – is also helping exchanges to take a big leap in terms of capabilities and offerings. Alongside the opportunity for new technology markets to provide much-needed common interfaces between different venues, a broader shift towards efficiency and scalability is already unfolding through consolidation.
Looking to the future
As we move ahead, it is through a collaborative effort that the market can address the challenge of funding new demands for innovation. With liquidity and best execution at stake, market connectivity is more important than ever. This bid for more options and flexibility is a prime opportunity to create a more resilient, agile market structure that can support the demands and direction of modern trading.
