A new dawn in stock trading is here. Your brokerage should embrace it!
London looks set to capitalize on the latest global equities trend of Spacs – This could well be the new trend for electronic trading firms. We investigate how.
During the past few years, it has been patently clear that regulators, many of which have been lobbied by the listed derivatives exchanges, and the listed derivatives sector itself have banded together in order to attempt to approach the retail client bases of OTC derivatives brokerages, consisting of large numbers of amateur and professional traders which have enjoyed the efficient, quick and cost-effective methodology of OTC trading.
Over this period, large scale mergers and acquisitions have taken place among exchange operators, consisting of buying OTC FX firms, in order to bring these entities onto their exchanges.
Now, the listed markets are taking a very interesting direction in that stock pertaining to SPAC (Special Purchase Acquisition Company) entities are a massive focus.
These SPAC listings should be of major importance to all electronic trading entities, and it is important to note how the stock market is becoming the prominent area of interest across the entire trading spectrum from wealth managers to hedge funds and down to retail traders. Venues have been for years trying to get the professional OTC traders back onto exchanges, hence those high-value acquisitions and initiatives by global executing venues in this direction over the years.
CME Group’s 2017 investigation into the possibility of embarking on a project in which it provides a rolling spot contract is another case in point, as that would position it as a direct competitor to OTC derivatives companies.
Then there was the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million. Now Deutsche Boerse is embroiled in its fraught merger with the London Stock Exchange, which has been deemed monopolistic by the European Commission, however that will proceed due to the imminent sale of LCH SA, the European division of LSE’s clearing division LCH.Clearnet as a condition of the transaction, whose buyers will be its largest customer.
Hotspot FX, one of the world’s most renowned OTC FX ECNs was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September this year, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes were reduced across all currency pairs to further improve hedging opportunities.
At that time, the idea was to increase Deutsche Boerse’s positioning in the provision of pre-trade price transparency in the derivatives area for institutional investors and taking an initial footprint in the FX derivatives space. An investment agreement was signed in December 2016, whereby Deutsche Börse will pay a US dollar amount in the single-digit million range.
FinanceFeeds was also aware at that time that this has been a focus for Deutsche Boerse for some time. Back in 2011, Deutsche Boerse took a minority stake in British FX technology solutions provider Digital Vega which was a technology vendor to buy-side and sell-side firms in the OTC derivatives sector.
EUREX bought the 360T treasury system, with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view. Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but was unable to do so as they failed to understand the nuances of liquidity provision in an OTC trading environment vs the exchange traded products dynamics.
More recently, it became clear that the OTC world is still very much in the sight of the exchanges, Luxembourg Stock Exchange investing in British bond issuance platform Origin, alongside fellow investor Clearstream.
Unlike shares of a company that trade on stock exchanges, most corporate bonds trade over-the-counter (OTC) Since they are not listed on major exchanges, investors must look to their brokers to arrange the purchase and sale of bonds in many cases hence here we go again with the listed derivatives leviathans attempting to get into the OTC sector via the back door.
Founded in 2015, Origin helps dealers and issuers streamline the issuance process and is currently used by over 20 dealers and 90 issuers across 50 cities worldwide.
The company says it will work with Clearstream and LuxSE on the creation of end-to-end, open access, straight-through digital process for issuance, settlement and listing of debt instruments, beginning with Eurobonds.
These are just a few examples. However, the picture is obvious, and now with the interest in SPAC instruments, brokerages have the absolute opportunity to hone in. This is an interesting move and brokers need to refine their abilities to access stock markets via good quality methods of getting onto listed venues.
It is hoped introducing these share structures will encourage fintechs, in particular, to list in the UK, after the government-commissioned Kalifa review found it would be “particularly attractive” to founders.
Manish Madhvani, co-founder and managing partner of tech investment firm GP Bullhound said this morning “We’re losing companies at the most crucial stage. We’re building these amazing companies, growing a lot of talent, as well as jobs and then the best entrepreneurs, are not able to list in London.”
FinanceFeeds spoke today to Roman Nalivayko, CEO of TraderEvolution Global, who said “In my view offering stocks already not just a must-have but becomes a kind of a fundamental part of the brokerage offering.”
“First of all, obviously, it opens access to a much wider audience. New generation brokers attracting a huge number of newcomers using simplified apps and this trend is heated by social activity and meme stocks” said Mr Nalivayko.
“A significant part of this wider audience is not interested in speculation but in a long-term investment using buy and hold strategy which is not achievable with the magin instruments. Having stocks as a part of the offering opens completely new ways for marketing, just an example, recently brokerage company Freetrade started interviewing CEOs of newly listed companies, which I think a very good initiative and a completely different view on marketing” continued Mr Nalivayko.
“Of course, in order to be part of this new trend, it is not enough just to add stocks to the current legacy trading platforms, brokers have to invest in modern technology by building their own software or partnering with the vendor that offers new generation technology” he concluded.
City of London stalwart Sir Martin Sorrell, executive chairman of S4 Capital, welcomed the “smart, pragmatic measures” noting “aligning ownership with control is in the interest of long-term value creation.”
Lord Hill’s review looks to capitalise on the latest global equities trend of Spacs. Also known as blank cheque vehicles, Spacs raise capital through a public listing with the purpose of acquiring an existing company. They’re considered an alternative to an IPO and offer private companies a faster and more predictable way to go public.
They have enjoyed popularity in the US – nearly 180 Spacs have been filed in New York alone – but current regulation makes London less competitive in this area. The review calls for the rules surrounding Spacs, where vehicles may have to suspend trading when a deal is announced, to be liberalised.
Mr Madhvani agrees there is a risk the Spac market could become overheated but that London has a “real shot to change the rules.”
“I think London would be good because it is more naturally conservative than some of the other exchanges. It means Spacs that do succeed, raise money and are backed by the institutions would be high quality and really understand tech.”
Now, with all eyes on stocks, and retail traders controlling the landscape of equities trading via forums such as Reddit, the intrinsic knowledge held by retail traders is absolutely out in the open. Now’s the time for brokers to capitalize on it.