Hopes of ‘turning point’ in European equities and navigating the rising concentration at the close

Published on 6 May 2024

Paul Squires head of trading for Europe, the Middle East and Africa, and Asia-Pacific markets (EMEA and APAC) at Invesco

Paul Squires, head of trading for Europe, the Middle East and Africa, and Asia-Pacific markets (EMEA and APAC) at Invesco, discusses the main events that could influence trading activity this week and provides his take on the liquidity conditions across European equities.

He provides his views on the “dearth” of primary market issuance seen in European equities in the last few years but says some positive signs are starting to emerge from the initial public offering and M&A space. The Association for Financial Markets in Europe published its Q1 Equities Primary Markets and Trading report which showed an increase of 387% year on year of public listings in Europe.

Squires also discusses why he believes there is a growing concentration of trading activity at the close and whether it is diminishing intraday liquidity.

Finally, the head of EMEA and APAC equities trading provides his perspective on the debate around shortening trading hours in Europe and whether it would make a material impact on liquidity across the region.

We have an extended version of the show only available to our email subscribers. In the full show, you will hear more on Squires’s views on the trading hours discussion and his thoughts on the proposal made by NYSE to have 24/7 trading.

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Interview Transcript

Jo Gallagher, Presenter Now we’re in the first week of May. Is it a case where it’s, you know, “sell in May go away” or how would you be advising trading desks to approach this week?

Paul Squires We certainly expect things to quieten down this week. It’s a relatively light schedule. UK GDP on Friday and we get the Bank of England rate decision on Wednesday. So those are perhaps the two biggest economic events this week. And there is still some earnings to come out BP, British Aerospace, Glaxo. There are still some things to watch for sure.

I think in terms of, you know, market levels or whether this is the right time to sell, I think you could probably make a case either way. So equities have performed pretty well they had a good Q1, particularly considering the volatility of the rate cut expectations and what happened to bond yields, etc. in Q1.

So against that, there’s a strong case for equities, particularly because I think, you know, the last couple of weeks, some of that steam has come out of the market a little bit. And that’s often a good healthy kind of correction or just consolidation to then move higher again. And certainly in terms of positioning,

I think that’s the way, you know, most of the sort of CTAs are seeing it. There’s still a heavy skew towards being long equities and short treasuries for example. But bonds more generally. So I would say it feels you know it feels pretty stable.

We think there might be sort of pockets of the market that are better positioned to continue to perform well. For example, mid and small caps that have underperformed for some time as interest rates have been high and those mid and small caps often have higher levels of debt.

Just in the last month or so, we’ve started to see that recovery by them. And that could be a pattern that continues. So I think there’s reasons to be positive.

Jo Gallagher, Presenter We also had AFME’s Primary Markets and Trading report out last week, and it showed us the European liquidity picture. It also showed some positive signs of pickup in terms of the IPO market. What is your view in terms of the trading conditions across Europe right now? And are we starting to see a turning point in the IPO market?

Paul Squires Look, I mean, I think the dearth of ECM across the UK and Europe is well documented. €170 billion net has been lost from the value of listed pan-European companies in the last year, and that represents 1.5% of the total market cap.

So definitely a turning point would be welcome. But there are some positive signs. You know, within that same time period, there was roughly €110 billion of issuance. So it’s not that there is none at all. There is some.

And I think looking ahead, there are definitely a few IPOs in the pipeline and we’re starting to see as well much more heavyweight European M&A pull back into the spotlight. You know, we’ve had BHP’s bid for Anglos and whether that triggers a, you know, kind of takeover competition. We had BBVA last week saying that they’re looking at Sabadell and there are smaller deals going on fairly regularly. So that kind of sparks a spotlight on UK and European equity markets. And I think that’s really helpful.

 I think the thing that perhaps just completes that sort of rejuvenation is having a more stable macro background, which we clearly haven’t had for some time. You know, as it becomes a more accepted narrative that interest rates are going to stay where they currently are. That could start to spur more corporate activity.

Jo Gallagher, Presenter One of the hot topics we’re discussing is the close. Tell us, why do you think there’s a growing concentration of activity taking place around the close, and is it having a concerning impact on intraday liquidity?

Paul Squires We see close market share at somewhere between 20 and 25%. If you compare that with the amount of business that is done around the open of the market, which is actually less than 1%.

The first thing you’re going to conclude is, is a very uneven distribution of trading activity through the course of a European market session. What you generally get is this kind of self-perpetuating clustering of activity. And that’s actually a helpful thing in terms of liquidity.

First of all, we start off with index funds. You have to trade at the close. Secondly, you get the perspective of people trading outsized orders. So institutional orders. They can be many multiple times normal market size.

So it’s really around finding liquidity. And the more that that closing liquidity comes through, the more the trader is going to be looking at that as an opportunity to execute a large proportion of their parent order. And then I think the third factor that comes into it is the growth of low touch or automated trading. And within that, for example, although we use many different strategies, what is a common strategy is a volume-weighted average price algorithm.

And by definition, the fact that it’s volume-weighted means that it’s going to point itself towards doing more activity towards the close as well. Having look to the historical volume distribution, we put all of that together. You’re going to get this sort of confluence of trading patterns, you know. Is that something to be concerned about? I don’t think so.

I think there’s always opportunities through the rest of the day. That’s one thing. And of course, one of the considerations when you’re trading orders is market exposure. So it’s not just a question of well, I’ve got this order at 8:30 in the morning, but I’m going to wait until 430 to trade it. You just can’t take that market risk. So I think traders will always be looking for opportunities throughout the day, but without any specific skew to that, there’s going to be a sort of default of a certain amount of that business happening towards the close.

We have ETF business now. We have index funds, we have quant funds, and we have fundamental funds as well. It’s a relevant consideration for all of those types of activities.

Jo Gallagher, Presenter Another topic that was widely discussed at Trade Tech was trading hours. Tell us, what are your thoughts on having shorter trading hours in Europe?

Paul Squires I think the debate is taking on different forms. Pre and post-pandemic. So I think pre the pandemic it was more a debate around just global markets becoming more synchronized and on that basis you know the Japanese market is open for five hours. The US market is open for 6.5 hours. No one can quiet work out why UK and European markets are open for 8.5 hours?

So I think that was kind of an original way of just asking that question, right. You know, the pandemic played its part in people becoming more aware of the consequences, of sitting in front of your screen, for 8 and a half hours, more than eight and a half hours a day, but at least eight and a half hours of market being open and also working from home. People have become much more aware of factors that contribute positively or negatively to wellbeing, and traders aren’t immune from that. Right?

 So it did become an important and healthy and constructive part of the discussion. And then I think the third part of it is often around the retail market, we just don’t have that size of retail market in the US has. I wouldn’t say that we are desperately shouting from the rooftops to have reduced hours, but I can absolutely see if it helps concentration of liquidity, a very sensible business case for doing that.

I think AFME, for example, representing the sell side, I think the IA (Investment Association) representing the buy side would be in agreement, seeing benefits from reducing market hours.

I think the barriers, being quite candid, are the exchanges who you know, are not in favor of that, because they would argue that every trade that gets done on their exchange is more revenue for them.

I guess the sort of fairly crude way of looking at [from the exchange’s view] is if you reduce the market hours, you are reducing our revenues. Our variable costs, for example, perhaps aren’t very significant. The fixed costs are much more significant. So we’re not really in favour of it. I think that would be the summary, to be honest.

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(European equities, concentration at the close, equities)