Only 65% of turnover in the UK, Europe's largest equity market, is
actually meaningful and executable liquidity with 35% consisting of
'noise' or reprints of already-conducted trades.
Cash trading is further diluted by a plethora of execution channels
as well as alternative products such as contracts for difference
(CFD). The true size of the investor market is masked by
high-frequency trading (HFT), concludes a research report* by TABB.
The data demonstrates the true size of the market and should lead
regulators to consider regulatory changes, according to the report's
co-authors, research analyst Will Rhode and Miranda Mizen, a principal
and head of European research.
"We selected the UK market since it is the largest in Europe,"
said Rhode. "It has a wide variation of order flow and channel usage
as well as the largest use of swap activity. We broke down turnover by
execution channel, market participant and by cash equity/swap
activity."
One of the study's objectives was to shed light on the makeup of the
opaque, over-the-counter (OTC) market and help clarify the debate
about this large part of the market as well as determine how much of
the UK market is conducted in the electronic dark market.
Although OTC reported turnover accounts for 45% of the market, TABB
estimates less than a quarter of it is executable. The balance,
according to Mizen, is comprised of reprints of already-traded
turnover with 72% of executable liquidity traded on the lit order book
of an exchange or multilateral trading facility (MTF). Dark trading
accounted for 11% of executable turnover.
The report also looked at the activity levels among different market
participants and established how much turnover was attributable to
HFT.
HFT accounts for 35% of the total turnover although this activity is
focused on the continuous markets compared with where trades can occur
in a continuous, electronic fashion such as the lit and dark order
books. While investors hold the balance in terms of market
participation in the overall market, liquidity providers dominate the
continuous markets with 77% of the flow.
This leaves just 23% made up of natural order flow. This, concluded
Mizen, "highlights the need for investors to have alternative
execution strategies to achieve best execution".
Another objective of the study was to determine the size of CFD market
by seeing how much UK equity trading is done on swaps versus cash and
how much equity trading is not subject to stamp duty.
The study showed that €1.3 trillion ($1.8 trillion) of the UK
turnover is CFD-related, representing 31% of total equity turnover or
half of the executable market in the UK.
"The combined effort of all these elements is that the UK equity
market is not nearly as deep as it may have at first appeared once you
extract non-executable liquidity or noise and high-frequency trading
from the picture," commented Rhode.
The conclusions are based on a top-down/bottom-up approach and used a
variety of inputs including public trade data, non-published data,
TABB Group studies and interviews with a range of market participants
including brokers, trading venues, retail brokers, hedge funds, and
institutional investors.
The TABB Group is a strategic advisory and research company focused on
capital markets. The group analyses and quantifies the investing value
chain from the fiduciary, investment manager, broker, exchange and
custodian.
* _Breaking Down the UK Equity Market: Executable Liquidity, Dark
Trading, High Frequency and Swaps, TABB Pinpoint study, by Will
Rhode, research analyst, and Miranda Mizen, principal and head of
European research, at TABB._
Source: HedgeFundsReview.Com
