The Transformation of the European Trading Market and What It Means for U.S. Investors11.30.2015
By William Fenick, Strategy and Marketing Director, Financial Services, Interxion
After an extended lean period stretching across several years – punctuated by tumbling equities, a dip in consumer prices and a slide in the value of the euro – the greater European financial market started off this year with a number of positive trends suggesting a prolonged rebound could be on the horizon.
In late March, U.S.-based funds invested a one-week-record $3.9 billion into European equities. Then, from the start of the year through last April, the European equities market quadrupled the gains of the S&P 500. And throughout this year, the Bank of America Merrill Lynch Fund Manager Survey has consistently provided positive assessments of the European market, calling it “the region to overweight in the coming year” and declaring that “investors remain bullish on European equities.”
Despite the extended downturn that preceded these recent positive trends, trading in the European Union has historically been an attractive option for U.S. investment firms, thanks to its 500 million consumers and diverse, abundant financial markets stretching across 28 member states. The EU is home to a corridor of established financial hubs and key trading venues, including London, Frankfurt, Stockholm and Madrid, as well as strong domestic, cash and derivatives markets, which traders have been able to leverage through expanded hosting and connectivity options. U.S. firms that have been trading in Europe have gained a number of benefits, including diversification of their investments and liquidity.
These favourable structural advantages to trading in Europe have been in place for years, and now, recent indicators, while they’re not by themselves predictive of improved economic performance by the European market on the whole, point toward improving market sentiment and perception, particularly on the part of U.S. investors.
But, perhaps most notably, a new regulation stands to bring the European market more in line with its U.S. counterpart and drive even greater U.S. investment in Europe. When it takes effect in 2017 or 2018, the Markets in Financial Instruments Directive II (MiFID II) standard will build on its predecessor to introduce greater transparency, new best execution standards and a more reliable structure to the European market. MiFID II will serve to level the playing field for financial firms and provide new opportunities for U.S. trading firms of all types and sizes, on both the buy side and sell side, to get involved in European markets.
U.S. firms that are already taking advantage of Europe’s existing trading infrastructure are well poised to leverage MiFID II more strategically and generate even greater success when trading in Europe, but it’s not a sure bet. These firms, and especially those that are entering the European market for the first time, must be sure to get a few key elements correct as they explore trading in Europe.
Navigating the New European Trading Map
The first and perhaps most critical step in entering the new European market is selecting the right gateway – the physical point of entry for a firm’s proximity hosting platform. And what U.S. traders are finding is that London is an ideal entry point, owing to its close proximity to key UK-based trading venues (London Stock Exchange, BATS Chi-X, Euronext and ICE Future European) and other European trading hubs like Frankfurt (which is a leader in asset price movements and provides access to Eurex, one of the world’s leading derivatives exchanges), as well as the access it provides to more than 100 capital market participants.
Once the optimal gateway is selected, the next step for U.S. traders is to assure they’ve adopted technologies to support ongoing operations. The ability of technology to facilitate low-latency trading is particularly critical, as the European Securities and Markets Authority (ESMA) found that high-frequency trading (HFT) activity accounts for between 24 percent and 43 percent of value traded in EU equity markets. U.S. firms have to be able to compete in Europe, so technology must support order execution and routing, provide connectivity to key markets, and facilitate ultra-low-latency microwave network connections.
Finally, seamless entry into Europe requires access to local expertise in its various markets. Even though MiFID II will make the European market more familiar to U.S. traders, and even though the diversity of the European market is in part what makes it such an attractive investment target to U.S. firms, there are nuances and conventions of each market that require particular wisdom on the part of the firm in order to be successful. This is where industry-specific communities of interest, colocated within data centers and that provide interconnectivity between the critical different players, become valuable. By having the right mix of access to local brokers, securities firms, exchanges, ISVs and service providers, all working in close proximity to one another, U.S. firms are able to better navigate the European market and ultimately better serve their customers.
A connectivity-rich, colocated data center that meets all three requirements – situated in London, outfitted with the right technological capabilities and providing access to communities of interest – helps U.S. firms assure interconnectivity and regulatory compliance under MiFID II. Ultimately, by executing from a colocated data center, U.S. firms gain a critical partner to help them overcome any barriers that may prevent them from seamlessly entering or expanding in the European market.
Doing so will not only help U.S. firms meet the requirements of MiFID II, it will also catalyze their efforts to adopt best practices for trading in Europe, and help them generate optimal returns for their customers.