Update on UK/EU Equity Market Structure
With Tom Stevenson, Head of Equity Trading, EMEA, Fidelity International
Briefly describe Fidelity International, and the profile of your trading desk?
Fidelity International offers investment solutions and services and retirement expertise to more than 2.5 million customers globally. Operating in more than 25 countries and with $739.9 billion in total assets, our clients range from central banks, sovereign wealth funds, large corporates, financial institutions, insurers and wealth managers, to private individuals. I am responsible for running for the European Equity Trading team for Fidelity International. The team are based in London but have been working remotely since March of last year. We undertake execution activity for all equity and equity-linked products within Europe, the Middle East and Africa, with dedicated sector traders who add value to our investment processes. We have a diverse mix of backgrounds and experience on the desk, providing us with a deep set of skills and abilities. My team is part of a wider global trading group which also trades Fixed Income and FX from hubs in Asia and Canada.
What has it been like navigating UK & EU equity markets amid COVID-19, versus previously, with regard to market structure and access to liquidity?
Traders know to expect the unexpected, as we have experienced turbulent events in the past and I am sure we will again in the future. Pre-pandemic we were coming out of the back of the MiFID II regulatory changes, which had brought significant changes to the market structure in Europe. As a firm we adapted smoothly to the regulation thanks to significant forward planning, whereas the challenge with the COVID-19 pandemic was the speed at which events unfolded. The early part of 2020 was extremely volatile by any measure, and as spreads widened and touch liquidity reduced in size, the cost of trading picked up materially. As a result, my team became a focal point within the firm for the latest intelligence, trends and those all-important liquidity opportunities. While market volumes exploded, the ability to source quality block liquidity was as challenging as ever, so having highly skilled traders connected to our investors and The Street really gave us an edge.
How did FIL traders adapt to working from home, and what’s next with regard to returning to the office?
At Fidelity International we always have robust contingency plans in place for difficult moments. As part of that planning my team already had fully deployed home trading set ups pre-COVID-19, so we were able to transition relatively smoothly to a remote working environment. Our technology teams were superb, helping all employees to set up their workstations and access, while I was hugely impressed by the resilience of our trading technology and communication systems. What really stood out to me though was the exceptional response from my team, who understood the importance of the situation and their key role to play in helping our investors and clients navigate some of the most volatile conditions ever seen. As we look forward to a return to the office, the firm is consulting with teams and individuals to really understand what works best going forward. My personal view is that the trading industry has proven beyond doubt we can work remotely, and with the right oversight in place this should form part of a healthier work-life balance, for those who want it.
What do you anticipate for the duration of 2021 in terms of industry working arrangements and efficiency, as (presumably) COVID-19 recedes?
Even before the pandemic I was a strong advocate for improving the working experience of traders. I supported the initiative to reduce market hours, which I believed would have not only delivered better outcomes for clients but could also have helped encourage a more diverse workforce into trading. I believe people work best when they are happy, motivated and energised and for some having the ability to work from home once or twice a week could be a key part of that. I do believe it is important to have time together as a team though as it is vital to share ideas, collaborate with stakeholders and just for that social contact. A structured mix of office and home working, I believe, is the best way to maximise the efficiency of my trading team.
What implications has Brexit had on equity market structure and access to liquidity?
Liquidity access has really been unchanged from our perspective, day to day. Spreads widened a touch in the immediate aftermath but stabilised very quickly and the transition of liquidity from UK to EU venues went as we expected. In general, we have found sourcing liquidity very similar to the way we did pre-Brexit; the key is to build strong relationships with our brokers and venues. The largest impact for us was administrative. Some of our investors are subject to the EU Share Trading Obligation (STO), while others are subject to the UK STO. The technology configuration to send the relevant fix tags to brokers from our OMS and EMS was relatively challenging while the monitoring of our brokers to ensure they respect the tags and trade on the correct venues also takes time.
Is there still more to come on Brexit and its implications for market structure and access to liquidity, or has that situation stabilized?
I think looking ahead, further regulatory divergence between the UK and the EU is something we have to watch for. For example, the FCA’s approach to the double volume caps (DVC) on dark liquidity is interesting. It is perhaps not expected to see a material shift of EU liquidity back to UK MTFs immediately, but is one to monitor should some liquidity move back due to differing approaches. Longer term, it will be key to see how the UK thinks about the STO, as changes there could perhaps lead to the greatest divergence.
What’s important regarding the MiFID II review? What challenges/opportunities does this present?
On the European side the focus will be around any changes to DVC thresholds, to Periodic Auctions and to the requirements on Systematic Internalisers. We support innovation and are keen to work with regulators to help ensure the best outcomes for all investors.
How do recent developments such as COVID-19, Brexit and/or MiFID II review encouraged (or hindered) innovation?
I think the time and investment taken around Brexit could arguably have been used for something more innovative that could have helped us achieve better outcomes for clients. That said, it is important we respect the regulations and take all the necessary steps required to do that. I think we have definitely learned things from Brexit and the pandemic that we can take forward into the future. For example, we didn’t know what the final approach to the STO was going to look like until pretty late on, so the ability for us to adapt again at short was pleasing and shows what can be done when technology and trading are fully aligned. We’re also building up a huge set of execution data which gives us new areas to analyse and explore to see whether we can improve our execution channel selection or broker algorithms. These events have shown us that maximising efficiencies within the trading desk and building scalable, long-term solutions are key to our future success.
Further out, what else needs to be watched over the next couple years that may hold implications for UK & EU market structure?
We did see a number of high-profile exchange outages across the globe last year, and I believe that is an area the industry will look to address. In Europe, often when the primary exchange has technical issues, liquidity will cease and we need to understand why that happens and what solutions exist. Of course problems will happen from time to time and we fully understand that, but the communication of the issues and remediation timelines really needs to be more robust. Whether the long-debated Consolidated Tape could help with this issue is another area I would expect to see progress on in the coming years.