Investment Operations

Addressing Uncertainties around OTC Market Data

Securities Lending and borrowing

A diverse and competitive market structure has ensured European equity markets remain robust, according to a recently published study by the Association for Financial Markets in Europe (AFME). The study analyzed the liquidity landscape of European markets using data provided by independent analytics firm Big XYT and revealed that for the first six months of 2020, 81% of addressable liquidity was executed on-venue, 13% on systematic internalizers and 6% over the counter (OTC).  Other key findings include:

  • 81% of total addressable liquidity is found on-venue, with 13% being traded on systematic internalizers and 6% pure OTC. The share between lit and dark markets remained stable after the application of MiFID II, with the quality of price formation remaining strong.
  • The current range of execution venues serve different functions and market needs. Continuous lit order book trading is not interchangeable with the service provided by systematic internalizers, which play a critical role for pension and investment funds. Pensioners and savers would be worse-off if diversity of trading was curtailed.
  • Better data-reporting is needed to benefit investors, including increased identification and flagging of the different trade categories.

According to AFME’s CEO Adam Farkas, a diverse set of competitive execution venues for equities trading better supports the needs of investors, allowing them to efficiently allocate investments according to their specific needs. A robust market structure fosters financial stability by providing a reliable cushion during distressed market conditions.

“We believe financial markets regulatory policy should not value the commercial interests of any one type of market participant, including exchanges, dealers and other types of intermediaries, over end-users,” Farkas said. “Instead, it should be data-driven and focus on bringing benefits to end investors and issuers. This study provides a factual analysis of the share of liquidity between different types of execution venue and we hope that it will be used to understand EU equities market structure in a more substantive and detailed manner,” Farkas added.

Better data collection

Farkis said AFME supports the substantial improvement of the identification of different trade categories, which he said should help ensure that regulators and policymakers are able to develop a greater understanding of the status of European equity markets. The European industry body commended ESMA, the National Competent Authorities and policymakers for their continued work to improve the quality and completeness of data.

“We believe a formalized, more inclusive public industry-wide forum would be invaluable to leverage market participants’ experience and contribution to improve data quality and availability,” said Sean Barwick, AFME’s Associate Director, Equities. “Furthermore, we believe improving data should be prioritized before considering more substantial changes to the EU transparency framework so soon after MiFID II implementation,” he added.

This analysis was produced using data provided by Big XYT, an independent analytics firm, and can be found here.