The probability of shorter trading hours in Europe is zero says global head of trading

Published on 3 June 2024

Eric Boess, global head of trading at Allianz Global Investors

Eric Boess, head of trading at Allianz Global Investors unpacks his views on the hotly debated topic of shorter trading hours in Europe and the challenges involved in such an implementation.

Boess provides a recap of the busy week just past and market reaction in response to the T+1 settlement in the US, the MSCI rebalance, the Trump conviction, and how markets have reacted. He also discusses the upcoming issuance calendar and what he expects in terms of cross-asset market liquidity.

In this episode, the head of trading looks at the significance of the retail investor and the difference in how retail flows shape market dynamics in Europe versus the US.

And finally, more broadly, Boess offers detailed insights on where he sees the greatest opportunity for innovation and electronification across the desk.

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Interview Transcript

Presenter Jo Gallagher Welcome to Twitter TV This Week. Your insight into our trading desk and prepare for the week ahead. I’m Jo Gallaher. Today I’m joined by Eric Boess at Allianz Global Investors to discuss the main topics and events leading this week. Eric, welcome to the show.

Eric Boess Thanks, Joe.

Presenter Jo Gallagher Delighted to have with us. To start us off, give us a picture of the current trading environment and what should we be aware of going into this week?

Eric Boess We survived the move to T+1 last week. Surprisingly uneventful. I would say. That on the week where you had the massive MSCI reshuffling, which is always one of the busiest trading days over the year. You had the Trump verdict, which is historic in its own nature, but to my surprise, it seemed like no one was really able to put a trade on it.

Looking at this week, with earnings season being over, and everybody coming back from shortened trading weeks, which we had a lot of in May, I expect this market now to focus a little bit on how to reposition for the upcoming summer break.

The main topic would probably be what equity markets make out of the recent developments in fixed-income markets. It’s a big month, June, for fixed income, with 340 billion of supply coming to the market. That’s obviously not exactly bullish. But then again, fixed-income markets have corrected a lot over me. So we’ll see how that evolves.

Volatility is super low currently across all asset classes. That’s still a good extent technical because most of the volatility in equity currently happens under the surface by a factor and sector rotation. That’s something I expect to continue this weekend and next.

With the ECB meeting on the sixth with ISM numbers out of the US with CPI numbers out of Europe. I expect those to be the volatility drivers. Not terribly bearish on the overall market, though. I wouldn’t be surprised if overall there was a structural buy the dip mentality remaining. I think sentiment is reasonably constructive. Liquidity is good. Judging from futures order books, liquidity, which is easiest to measure, liquidity looks totally fine into next week.

Presenter Jo Gallagher Retail participation is a hot topic of late. Are you seeing substantial growth in retail flow?

Eric Boess I wouldn’t call it growth. The US retail community has always been there since 200 years, and they occasionally just get very active. The first meme mania was in 21. You see a mild replay of this this year. They found new hobby horses like crypto. But I think the retail community in the US hasn’t fundamentally changed for a while now.

In Europe, I’m pretty glad that there’s a retail community to begin with, which is obviously significantly smaller than in the US. I struggle to see a fundamental shift up in the amount of retail activity in Europe. But historically, if you see a market crash like the 1 in 2000 that wiped out a whole generation of retail investors, they never touched equities again.

This is different this time around. You had three major market corrections since 2020 with Covid, the invasion of Ukraine, and Credit Suisse. SVB and the retail community in Europe are as active as it was pre-COVID. I think that’s a fundamentally good sign you can build on, but I don’t see a structural rise in the activity of retail investors in Europe as of yet.

Presenter Jo Gallagher How does retail participation shape market dynamics and trading conditions?

Presenter Jo Gallagher In the US, retail investors interact directly with order books on the exchanges. You’ve got the payment for order flow, which distorts the picture a little and makes some of that flow inaccessible for investors like us. But in principle, U.S. retail investors trade on exchange.

They trade stocks, they trade ETFs, they trade listed options again on the exchange. That’s a very noisy order flow, which is interesting and helpful to interact with because it looks different than institutional order flow, which makes the whole marketplace more stable because it’s two non-correlated order flows. Retail things are different about the investments I guess institutional probably wouldn’t buy GameStop at 30. Retail does that occasionally. So that makes the overall market more stable.

In Europe, retail activity is channeled primarily through warrants and certificates. So retail investors in Europe don’t directly trade on Eurex or Euronext. When they trade options, they trade warrants. So what happens is that the issuing banks then hedge their overall book on exchanges, and that looks much more like institutional flow. So you don’t get the same diversification effect from retail participation as you see in the US, which is probably the key difference in market structure, and why retail in Europe and the US look different with respect to trading patterns.

Presenter Jo Gallagher So what are your thoughts then on the debate around the shortening of trading hours in Europe?

Eric Boess I’m not going to make many friends now. The person Eric Boess will tell you three hours of trading totally enough works well. The trader Eric Boess working in this industry will tell you it’s a nice idea, but it’s never going to happen simply because Europe, sitting between the Asian session and the US session, kind of connects the two. That actually is helping, but it spreads liquidity out quite a bit.

Now, to shorten that trading window, you would need all 200 and something trading venues in Europe to agree on shortening it. That goes against the grain of what exchanges usually like, they like longer trading hours, because the longer trading hours, the more trading happens. So the exchanges don’t have a fundamental interest in this.

At the same time, you see that most of the major risk transfer markets be that currencies S&P futures, euro stocks, bund treasuries, trade between 20 and 23 hours already, and crypto trades 24 seven. And interesting enough institutions as well as retailers like the fact that crypto trades 24 seven. Now whether I like that or not is a different story, but the probability of exchanges and all other stakeholders in equity markets agreeing on shorter trading hours is nil, in my personal view.

Presenter Jo Gallagher More broadly, where do you see the greatest opportunity for innovation or electronification in fixed income or equities?

Eric Boess If I have to choose one of the two, it’s clearly fixed income. I would add FX to that as well, because I think one of the biggest markets for electronification, as you put it, is actually in FX. The fact that the biggest of all markets, in notional terms, still trades OTC and not via standardized contracts, even though most of the call it Eurodollar trading is directional in nature and doesn’t need a terrible lot of customization is still beyond me.

In fixed income, I see that listed credit futures are the next big thing. Now it’s not new new. Eurex launched theirs in 21. The CME Group will launch theirs on June 17th I think. So there are credit futures out there already. Not a massive success story as of yet. Open interest on the listed European contracts is something like 6000. Pretty stable, so nothing major, but I think it’s something that the market clearly needs

Historically fixed income derivatives were about duration primarily. So you’ve got your points on the treasury curve and on the bund curve you can trade, you’ve got swaps. So you can manage duration using derivatives.

But credit you could always only run via credit default swaps which are difficult to access for many investors because they are OTC. All since a couple of years via ETFs think HYG, which many fixed-income investors can’t trade and yet they are a little bit more difficult to short.

Fixed income is all about duration, curve, and credit positioning, and you still don’t really have a plain vanilla future-style credit instrument. I think there’s a big demand for that. I think exchanges are now supplying the instruments, which are better designed than some of the earlier tries. I think this is probably one of the areas where I see potential massive growth.

Presenter Jo Gallagher Thank you, Eric, for your insight and of course you for watching. This has been Trader TV This Week.

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(trading hours, trading, global head of trading, Europe)