Depleted buy-side commission wallets, order allocation, adoption of commission sharing arrangements (CSAs), algo developments, and broker-selection trends point to clear parallels between the US and European equity markets. The evolution of today’s market structure -- and with it, trading behavior -- used to largely follow the jet stream west to east, but wallets and regulation are changing the current, and we will see greater divergence in the next two years.
There is much that is similar between the US and European markets. Demands from the buy side for greater transparency into algorithmic environments, a voice in the creation of new coverage models, natural block-trading products and help navigating the markets all create common ground. But the intensity and consensus of opinion, and the root causes and effects, have a very geographical feel to them.
The allocation of order flow across high- and low-touch channels in the US is reaching equilibrium, but Europe is still moving toward more electronic trading. Lower volumes have hit both continents hard, but the combination of a European wallet that plummeted 29% in 2012 and the opening door to CSAs will cause those who trade in Europe to choose brokers and products with a different eye.
As the markets on both continents continue to evolve, regulation lies at the heart of divergence, and in Europe this will be both at a national and a EU level. Market structure change is on the outer ring of the SEC’s radar, and radical change is unlikely in 2013. In contrast, MiFID II is in the bull’s-eye of regulators and politicians in Europe, and the true shape of it will emerge this year.