How has the summer volumes been?
Olof: Coming back from holidays I was surprised to notice the low activity in Nordic equities (including OTC and the MTF’s) – down almost 50% over three months. Even though volume is seasonally low over summer, you would think that the positive reports would have a more positive effect on the volumes.
Why do we see this development?
Olof: There are several reasons for this according to buy- and sell-side participants I have spoken to recently:
- tick size reduction has reduced the incentive for on-exchange liquidity provisioning – the tightened spreads are useful only to retail investors.
- indexation of long-only accounts – more fund managers reduce the active part of the portfolio which leads to smaller trading volumes.
- traditional traders and market-makers are reducing risk or shutting down due to lack of profitability or funding.
- credit and margin terms for market-makers and professional traders have deteriorated .
What else is happening in the Nordics?
Olof: With the introduction of MIFID, we now have a fragmented Nordic landscape where the traditional exchanges are losing market share to new execution venues. Clients have gotten more and more educated and are now better equipped to do their execution business themselves rather than working an order through a broker. The sell-side industry in the Nordics are now struggling to adapt to the new world with multi-venue execution capability in a shrinking market. Nordic banks and securities trading firms have been busy with the exchanges technology projects the last couple of years and are now dealing with the fragmentation a bit later than European competitors.
What do you think this will lead to?
Olof: Looking at the UK experience, smaller firms give up the in-house technology race by outsourcing to larger providers and concentrate on value-added services. If the dismal trading volumes persist, I predict that we will enter into a classic consolidation phase already during the fall where there will be winners and losers. There are at least two obvious beneficiaries here; the new automated/algorithmic trading firms who specialize in electronic trading and market-making; and the larger firms who can offer their platform to competitors – leading to increased income without incurring additional cost. Stay tuned for the next phase of market development!