It’s been a busy and turbulent year for markets and trading desks. Lee Batholomew, global head of derivatives product, research and development for fixed income and FX, at Eurex and Mike du Plessis, senior managing director, at Liquidnet speaks to Trader TV on the latest episode of Marketplace to discuss the main market drivers that have shaped investment and trading strategies in 2024.
From elections to inflation and geopolitical risks, the two unpack how trading desks have reacted to chaotic spells of volatility and the challenges of assessing and accessing liquidity during high or low periods of volatility.
Du Plessis looks at how education and training play a role in using derivatives products and data analytics to manage risk or improve execution outcomes.
Batholomew discusses the growing competition in the futures space and how he sees this playing out in 2025.
The discussion further covers, how trading capabilities and analytics in credit need to evolve and enable greater liquidity insights and conditions across OTC and listed markets.
Interview Transcript
Jo Gallagher Welcome to Trader TV Marketplace, where we learn exclusive insights from market operators. Today I’m joined by Lee Bartholomew at Eurex and Mike du Plessis to discuss the main drivers shaping investment and trading strategies this year and where derivatives are playing a role in Europe. To start us off Lee, what effect have macro factors had on investment and trade decisions year to date?
Lee Bartholomew I think they’ve had a big impact. So you’ve typically seen Europe lag the US in terms of volume development. If I look at that as a metric, right. So what’s that lag around 6 to 12 months? So I think for Europe we still have a lot more tailwind, especially as we go into Q1 of next year. What’s driving it? I think you’ve got geopolitical risks. Sometimes it’s pricing, not priced in enough. You’ve got domestic politics, elections. You’ve got central bank divergence. In Europe, I think people have looked to play that via Delta products rather than option volumes. Why is that? I think option volume is relatively low.
I think people have been comfortable playing RV and also just taking outright positions. So therefore we’ve seen that in our numbers. If you look at our business, we had a strong year last year, double-digit growth, and this year we’re the same again, double-digit growth, something I’d expect to see into the end of the quarter. What’s the risk for the next year or the headwinds would be for me if that conviction isn’t the same, from the macro community in Q1. And I think some of the geopolitical risk is being underpriced at this moment.
Jo Gallagher Yeah, pretty interesting. And Mike, what have you seen from this year?
Mike du Plessis We’ve seen very stop start markets and I think that’s been a function of how tricky it’s been to track inflation. The Fed was certainly priced a cut early in the year, which made sense. Inflation peaked at the lowest level in the US amongst the major economies and it fell the fastest. But in fact, the ECB and the Bank of England beat the Fed to the first rate cut. We’ve then had a series of specific events that have made it difficult for traders. The French elections, we saw liquidity in the .. plummet. It was quite extraordinary the extent to which that impacted short-end liquidity in the core European bond markets.
The payroll number that we saw in October, the September payrolls, really did crush SOFR, which is the world’s largest contract. It’s up 15% year to date. But it had its single largest single-day fall and open interest as a result of that payroll print. And it was critical because Fed Chairman Powell pointed us to uncertainty in the labor market at the same time as they cut 50 basis points. And then with the US elections and the UK budget, we had events again that made it very difficult for people to trade. So the markets were on or off. And that’s a dangerous place for a trader to get involved because you have long periods where you don’t have a feel for the market because you’re not active. So the question then is like, how do I assess liquidity when I’m not busy, when I’m not actually engaged in the market? So that’s been a really big concern that’s come out of the macro picture.
Lee Bartholomew Going into the beginning of the year. You had this kind of fast money versus real money positioning, right? Short versus long, different curve positions. I think you saw some of that unwound, put back on. You’ve seen people more comfortable trading macro as well. So the macro performance, a lot of the funds has been positive. However, they have seen decent drawdowns in August. You look at September, we’re back on now with event risk. So what you’re seeing is people wanting to use alternative liquidity pools from OTC.
They’re looking at how deep those liquidity pools are. I think if you look at SOFR, you’re seeing disconnections, right, between kind of fixing risks forwards and positioning, which is causing, I think, both sell-side and buy-side headaches, but also opportunities. At the same time, I think liquidity in derivatives has been growing in Europe because you’ve seen people spin out of larger funds set up on an RV basis independently. That filters through as well into liquidity. And you are also seeing across different products. If I look at credit, for example, you know, the Jane Streets of the world, the Susquehanna’s, the flows. They are coming into the credit markets. Credit products are being used more and therefore the end user is getting comfortable using more and more derivatives. And I think you’ll continue to see that trend into the first quarter.
Jo Gallagher And Mike, how is education across derivatives shaping patterns of use?
Mike du Plessis I think education was a fundamental aspect of the establishment of listed derivatives markets, and the exchanges were very active in education alongside the FCMs. And many buy-side institutions made use of that type of education alongside private providers. I think that tailed off a lot after the financial crisis. It was one of those costs that was easy to cut. But we’re definitely seeing a resurgence now in education. And I think that’s partly driven by the fact that people have been busy on limited resource and now need to do some catch-up. But it’s also being driven by the establishment of new products.
Particularly in the equity space, you see sectors, dividends, and total return index futures that are replacing what have traditionally been swap and security-dominated functions. So when you launch new products, you need to have education that goes alongside them. The buy side needs to believe that they will settle the way they think they will, and that they will understand that process. And then there’s the element of trading those products. So sometimes the screens can appear illiquid, even blank, but that doesn’t necessarily mean there’s no liquidity. And so there’s an element of education that goes around that, too.
Jo Gallagher We’ve seen a lot of launches this year, particularly in the future space. How do you see competition between venues and market operators playing out?
Lee Bartholomew You’re going to see increased competition, especially if you look at credit and FX equity like models. I believe you need to be multicurrency in those products. So you need to be much more global in thought. You’re serving a global client franchise and therefore you’ll see competition increasing. However, back to the previous point on education, you have to invest a lot of time to get fixed income products off the ground.
Historically, exchange equity teams have been the product development for the sell side and the buy side. Whereas you still have IN fixed income, quite a lot of OTC markets. The drivers and uses of the listed market therefore as you see an acceleration to the use of things like credit, index futures, and so forth. You’re going to get more and more competition because these markets are nascent. So therefore, I can see an acceleration coming. But you have to put the groundwork in first.
Jo Gallagher And what are the next steps now in terms of improving liquidity in the space and trading capabilities?
Mike du Plessis We talked about that being a legacy of education debt. I think the same is definitely true for technology. The data that underpins markets is profligate. There is so much of it, and yet it’s very difficult to manage for a lot of buy-side traders. We’re very focused on providing data tools that allow for better decision-making in real-time. I think it’s critical that you have a good ability to understand liquidity at any point in time, even when you’re not trading. You know, very often it’s not till you start trading that you really begin to get the feel for liquidity. And I think proxies for understanding that are really key. It’s something that we’re working really hard on at Liquidnet with Pre-trade Analytics.
One of the things that’s being quite tricky for the futures markets is to accommodate less liquid products where an execution algo is not necessarily the correct approach. And so RFQ becomes a more appropriate way to access liquidity. It’s amazing to me that we got to this point and technology doesn’t exist that can allow the buy-side trader to transition during their workflow between the two execution methodologies. As you transition between execution methodologies within a single trade, the means by which you judge your execution performance suddenly changes. And that’s an old thing too to me, that you switch from a sort of market-impact model of a schedule-based algo to, you know, a best of three responses in an RFQ without referencing market data all of a sudden. And that’s one of the things that we’re really working hard on. The idea of being able to manage execution in a much more dynamic way across execution methodologies and provide the data that goes alongside that to demonstrate why the order type did what it did when it did it.
Lee Bartholomew I’ve always said it’s about total liquidity and it’s about getting the players to interact with one another. There’s been lots of talk about non-bank liquidity providers growing and then the sell side. But they’re finding ways to work together to build total liquidity. And I think it’s about a combination between what is electronic and what is largely kind of RFQ based and then building that infrastructure out from there, especially where new products are coming out.
Jo Gallagher I’d like to thank Lee and Mike for their insights today and, of course, you for watching. To catch up on our other shows, including Trader TV This week go to Tradertv.net.
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