The European financial trading markets are supported by a wide range of market infrastructure (e.g., exchanges, clearing counterparties, depositories, custodians and numerous other service providers). This market infrastructure landscape is evolving but the “right” direction of that development is not universally agreed.
There are multiple stakeholders who want to influence the market infrastructure of the trading and settlement world (users, owners, governments, regulators). Each of them has a need for the infrastructure world to support their own personal goals and not all of them can be completely satisfied.
The users (e.g., banks, brokers, etc.), have a number of goals which are sometime contradictory, they want:
- to have multiple execution venues to ensure that execution fees are competitive but at the same time that there is sufficient liquidity at any particular venue to ensure their orders are filled (they may have smart order routing / liquidity finding technology to mitigate this last point but multiple execution venues drives up costs of partial executions);
- to have central counterparty clearing services for all products to protect against default (currently only a subset of products has central counterparty clearing) with highly evolved netting for margin requirements across products;
- to have multiple clearing venues to ensure that clearing fees are competitive but at the same time that these clearing venues offer efficient interoperability between themselves and all settlement venues (and with no single clearing counterparty represents an unacceptable risk from catastrophic failure)
- a simple single settlement venue with efficient links into all market venues;
- influence over the development of the market infrastructure participants (and a share of their profits);
- the ability to eschew the use of public transparent liquidity pools in favour of internalised trading (and dark liquidity pools)
The goals of the other participants are a little more straightforward and include:
- Market infrastructure companies (e.g., exchanges, clearers, settlement venues) are focussed on being profitable and as such they want:
- protection from new entrants but also the ability to credibly claim they operate in a competitive market
- strong risk management processes with market participants who have similarly high quality processes
- Regulators want to ensure that:
- a majority of products are cleared through central counterparties to reduce market risk
- there is transparent risk management from all participants
- Governments would prefer that:
- They do not accidentally lose control of their domestic market
The Deloitte approach
At Deloitte we understand these pressures and the trade offs being made in the evolution of the trading market infrastructure. We regularly work with all types of participants across many areas of activity including technology, business strategy, taxation, regulation, operations and acquisition due diligence.