Trends in trading for 2021
Greenwich believes that the attractions of netting and or central clearing of trades will become more important to non-bank FX market makers and other smaller counterparties, who are increasingly frustrated by margin requirements and credit limits
What can we expect to see in terms of trading trends over the course of 2021?
From an investment standpoint, a rotation out of technology and growth and into stocks and other instruments that are likely to benefit from the reflation trade seems to be the order of the day. Particularly if, as looks increasingly likely, President-elect Joe Biden carries both the US Senate and the Congress. Commodity prices and bond yields are rising whilst the dollar remains on the back foot, at least for now.
However, what about trends within market structure and operation which affect how, when and where that business is transacted in the markets?
As we reported yesterday we have seen some enforced changes in European equities trading with volumes moving to MTFs based in the EU and away from those based in London though these are often owned and operated by the same organisations.
Are there any more substantive trends we can identify, and that we can expect to continue across 2020? Research company Greenwich Associates, now part of S&P Global, has published a report that attempts to do just that.
The consultancy highlights 11 key areas within the report that it believes will shape trading in 2021.
The first of these is not a carryover from 2020 but an echo from just over a decade ago and that is regulatory reform. In the wake of the 2008 GFC, the authorities moved to introduce regulation aimed at preventing a re-occurrence of the credit crunch and subsequent market crash.
They did this by legislating against businesses that were deemed to be “too big to fail” and banning banks from proprietary trading and direct investment in hedge funds.
Greenwich believes that under the Biden administration the US SEC will seek to gain greater control and oversight of US bond trading, Both government and municipal and the increasingly popular electronic execution venues for these products.
The second key trend for 2021 is the continued diversification of exchanges some of whom will derive ever more of their income from non-trade related revenues.
The recent purchase of Refinitiv by the London Stock Exchange Group is a prime example of this trend but both Nasdaq and ICE are increasingly data-oriented. The latter earning around a third of its revenues from data services. Others exchanges such as the CBOE continue to make acquisitions that open up new markets and opportunities that the changing trends in trading present.
One such area is off-exchange trading which now accounts for as much as 40% of US equity volume. Bloc trading systems and venues that offer a guaranteed market on close order type are increasingly popular according to the report.
Equity traders have been happy to experiment with alternative exchanges and new order types it seems. Three new exchanges were launched in the US in Q3 2020, the Long-Term Stock Exchange (LTSE), the Members Exchange (MEMX) and the Miami Pearl Equities Exchange (MIAX Equities) each of which offers a distinctive take on the equities trading space.
In FX we have continued to see the evolution and importance of counterparty risk. At the top end, the use of netting services such as CLS allows large traders to monitor their exposure, net their balances, thus reducing the number of settlements/payments required. Whilst making the most efficient use of their funding.
Greenwich believes that the attractions of netting and or central clearing of trades will become more important to non-bank market makers and other smaller counterparties, who are increasingly frustrated by margin requirements and credit limits.
The CME now offers FX spot and futures trading side by side the latter, of course, is centrally cleared. Spot and FX futures can become fungible through the use of an EFP or Exchange for Physical, something that we would anticipate an increasing use of in 2021.
Alongside the growth in commission-free retail trading which exploded in 2020, as people stuck at home with time on their hands took up day trading, we saw an increasing interest in listed options.
The Greenwich report attributes that interest to: “The move to zero commissions, the launch of retail options trading apps, and the failure of traditional hedges” adding that “While trading volumes in most financial instruments declined after the government intervention calmed markets in the spring, single-stock listed options volume kept on growing”
Though there are more than 12 exchanges that offer options trading on US equities and equity-linked products. Greenwich believes that we may see further entrants into the market place. Which it sees as having relatively low barriers to entry for any existing exchange, that doesn’t currently offer an options product.
In their words: “The technological lift (required) is small and the market share necessary to reach profitability is even less, now that market-wide (options) volumes are so much higher”
Judging by the findings of this report 2021 could be a year of opportunity bolstered by innovation and a willingness to change or try something new and that’s very much to be welcomed.