As a massive portion of European trading takes place after US markets open, Chris Collins, equity trader at Lazard Asset Management, says the continent’s eight-and-a-half-hour trading day is outdated and needs renewed scrutiny. Looking at the last six months, Collins also dissects whether he has seen any shifts in volume distribution in response to the intermittent news events and elevated volatility.
While trends in the US show that platforms are experimenting with 24-hour access for the growing retail space, the equity trader looks at how European volumes remain predominantly institutionally driven and shares his views on the structural changes needed to advance the conversation around improving liquidity, competitiveness, and efficiency across the bloc.
Transcript
Jo Gallagher Why has the discussion around European trading hours become increasingly relevant in today’s event-driven environment?
Chris Collins I think the broader discussion around global 24-hour trading has become increasingly loud and relevant in the current climate. The move in the US towards venues that operate on an extended basis has meant that it’s inevitable when you look at the US going down that route, Europe will get more and more attention and questions will be asked as to whether or not Europe should be following suit. I think if you actually dissect what’s happening in the US, some of the headlines are probably a little bit misleading. We still observe that the vast majority of US liquidity is trading in the main six and a half hour US session, well in excess of 90% of volumes, typically. The pre and post-market trading and particularly the really late night through the night trading constitutes a very small proportion, very, very small portion of US trading volumes. It’s a rounding error in terms of what’s actually going through the market. I think it’s really important as well to look at the makeup of the investors. In the US, you’ve got a much heavier retail presence. 20%, 25% of volumes in the US are directly attributable to retail participation in the market. In Europe, that number is more like 5%. A lot of the demand for out-of-hours trading is coming from the retail space. I think it is really important to frame the discussion in Europe around the context of the investor base there and the way that that investor base operates. I think we should be doing more to attract more retail to the market in terms of investor education, financial literacy from a young age, removing some of the financial transaction taxes, et cetera, within Europe. Those are bigger picture things in terms how you attract the retail investor, but giving the retail investors some more flexibility around when they trade in Europe, I think has some validity. But I don’t think it should be the tail that wags the dog per se. Institutional investors make up the vast majority of European investment in the market still. And institutional investors are looking at the way that European volume is distributed at the moment. And for me, it’s very suboptimal. You’ve got the longest open primary markets in the world in Europe, eight and a half hours. When you actually look at the volume distribution, well over 50% of just about every European market trades from after the U.S. Opened. So at most, that’s a two-hour window. In the case of countries like Norway, it is less than an hour. More than 50% of the volume is trading in that two-hour overlap. In some markets, like the UK market, it’s more like two-thirds of the volume. So you’ve got this six-and-a-half-hour period of the day in Europe where volume is patchy at best, elevated spreads, liquidity is really poor. And it’s just unnecessarily drawn out and some of the historical reasons for that, such as the overlap with Asia, are just redundant now. Most of Asia is shut by the time that we open in Europe. I think it’s time to review things in Europe, absolutely, but it needs to be done in a context of what is specific to Europe, look at what the investor base of Europe are demanding, and tailor any changes to optimize it for that investor base, not just copy what the US are doing.
Jo Gallagher Over the past six months, have you seen a shift in trading volume distribution in response to intermittent news events?
Chris Collins In recent times when we’ve had significant macro events such as the tariff announcements of early April, where we saw the two biggest European volume days in history on the 4th and 7th of April, what we see during those times is an increased mood towards trading on the lit books, both primary and MTFs, as traders are trying to get things done with a greater urgency. So, you know, roughly an increase of about 10% of the day’s volume was observed to move onto the lit book during those periods, largely at the expense of what was going through the closing auction. Once that sort of volatility dies down, what we observe is you return back to those long-term sort of structural trends of greater and greater volume trading, you know, in the overlapping part of the day with the U.S., which is far more driven by things like more and more passive management globally, more ETFs, both of which, you now, a lot of the time their NAVs will be marked to the close, so a lot their trading is done on the close. Which becomes a self-fulfilling prophecy for traders like ourselves who are going to try to capture as much of that liquidity as we can and orientate more of our volume to the close as well.
Jo Gallagher What actions are needed to advance the conversation in European trading hours and ultimately create a better liquidity environment?
Chris Collins I’m of the belief that reducing primary market hours and thinking a little bit more smartly about offering something a bit more extended that’s more retail centric will lead to much better investment outcomes for all participants in the market. I think it needs to be a concerted, coordinated approach where all participants are communicating with each other and discussing this issue, be that buy side, sell side obviously, the exchanges who ultimately are the ones that set the hours that they operate. There is no point one exchange doing something on their own because that’s not going to help anybody. It needs to be coordinated at the exchange level. As we did with the harmonization of European market hours 20 odd years ago, I think more pressure from the buy side on the exchanges to look at this issue is what we need. Ultimately, institutional investors make up a very significant portion of the trading volumes that go through the European equity markets. And having had discussions with all the large exchanges, my sense is the exchanges are open to change if demand for that change is coming from those investors that are using the infrastructure. So I would say to my buy side colleagues out there, if they see the merits in what I’m saying, discuss it with the exchanges, engage with the exchanges and let’s see where we get to. You know, ultimately, we want to make Europe as competitive as possible and make the trading landscape for us all as optimal as possible. And I think the trading hours conversation is a small but very important part of that.
Jo Gallagher Thank you, Chris for your insight, and of course, you for watching. This has been Trader TV This Week.
To watch other Trader TV This Week shows go to – Video
Or make sure to follow us on LinkedIn – Trader TV’s LinkedIn
Available as a podcast – link
