David Howson was promoted to President of Cboe Europe on January 1 2020, taking the reins at Europe’s largest pan-European stock exchange. David provides his views on the radical proposals to reform European equity market structure, the industry’s reaction to the COVID-19 pandemic and updates us on the group’s expansion plans into clearing.

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Firstly, how have European equity markets reacted to the COVID-19 pandemic?

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The response of the industry to the unprecedented situation we’ve all found ourselves in has been nothing short of incredible. We should all take comfort from the fact that Europe’s market infrastructure has stood up extremely well to the challenging circumstances and high levels of activity experienced. That is testament to the work of all participants: Markets have been functioning as they should, investors have been able to manage risk appropriately and it was absolutely the right call for markets to stay open.

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For Cboe Europe’s part, we moved all staff to remote working in London and Amsterdam in early March, without any operational issues or loss of focus on projects to improve markets for participants. Like many operators, we experienced all-time record volumes across many of our platforms during March, notably Periodic Auctions and our block trading platform Cboe LIS, with no system downtime.

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We are, of course, monitoring local government recommendations and actively planning how best to re-populate our offices in line with that guidance, whilst keeping the health and wellbeing of our employees as the top priority. Given the success of our work from home plan though, we are not planning to rush that return.

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What are the key areas of focus for Cboe Europe this year?

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The over-arching aim is to continue to execute on our longstanding strategy of bringing innovation and cost-efficient competition to the European marketplace, to benefit end investors. To that end, one of our top priorities is advocacy around the review of MiFID II/MiFIR, which is being undertaken by European regulators this year. We submitted our response to ESMA’s consultation into MiFID II’s equity market transparency last month (which can be viewed here) and are finalising our submission to the European Commission’s separate consultation paper. We believe, as I’m sure most market participants do, that many of the areas consulted on need careful consideration in order to avoid causing damage to European equity market structure and we have provided a robust response. We must ensure the MiFID II review is not used to reverse the progress that has been made over the past decade to open up European capital markets.

 

What are the main points you are making to ESMA and the European Commission on the MiFID II review?

 

We have emphasised our belief in the need for a healthy eco-system of complementary execution mechanisms to support a diverse range of trading strategies and different market conditions. This has developed since MiFID I allowed competition, to the benefit of end investors, and having this choice is particularly important in low volume environments as well as during extreme market stress, as we have seen in recent months. This period has demonstrated the strength and resilience of European market structure and the eco-system that exists - we must ensure we preserve it, and only make enhancements where appropriate. With that in mind, we stressed to ESMA the importance of retaining choice for investors when it comes to trading mechanisms – this includes all waivers and the SI category.

 

Why is it so important to retain reference pricing waiver trading systems?

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Reference price waiver systems are highly valued by investors to satisfy their demand for urgent, low-impact midpoint executions, which are often the result of larger orders being broken up into smaller pieces and spread throughout the day so as not to adversely move prices. You only need to look at buyside responses to ESMA’s recent consultation to understand the value they get from these platforms. While we recognise the effort and associated cost of implementing the double volume cap (DVC) regime, we believe the caps should be removed in their entirety rather than arbitrary alterations made to the current thresholds. The DVCs have introduced cost and complexity and delivered no clear benefit to execution performance and end investors.

Opponents of choice and competition in execution services often argue that a limit or even outright ban on reference price systems is desirable because, if left unchecked, volumes on reference price systems will continue to grow at the expense of lit venues until there is no more lit trading and therefore no price formation. We believe this argument is flawed for several reasons. Firstly, there is no evidence that the presence of these systems damages price formation. Secondly, it assumes that activity unable to take place under the reference price waiver would simply revert to lit markets, which is unlikely to be the case. In fact, it has demonstrably not been the case during the imposition of the DVC caps. Furthermore, as evidenced in the US, there is a natural ceiling to activity in dark pools which prevents them from reaching levels that would be damaging to price formation. If lit venues don’t have enough volume to create reliable reference prices, the reference price venues become redundant.

 

What are your other priorities this year?

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We are laser-focused on enhancing our core equities products. As eluded to above, we saw record volumes on both our Periodic Auction book and Cboe LIS block platform in March. We continue to see a strong pipeline of new clients for both platforms as well as existing clients looking for ways to optimise and extend their interaction with these pools of liquidity. This reflects the desire from the buyside for venues which minimise market impact, offer greater size and allow for price improvement. For Cboe LIS, April was another notable month with our overall share of the LIS market growing to a record 24% (see chart). On several days throughout the month, it also ranked as the top block trading platform by value-traded. The average trade size for pure buyside participation was €1.4mn during the month, with the largest trade a €40.9mn transaction in BP PLC shares. This is testament to the positive response we’ve seen from our clients across Europe who appreciate the platform’s diversified buyside and sellside liquidity, easy-to-use characteristics and protections from information leakage.

 

How is your EuroCCP acquisition progressing and why is that deal so important?

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Our acquisition of EuroCCP remains on track, pending regulatory approval and other closing conditions. Strategically, we are both very aligned. We are both strong advocates of choice and competitive, open pan-European financial market infrastructure to bring efficiencies and cost-savings to Europe’s trading community. Supporting EuroCCP’s equities business to maintain and enhance those benefits is paramount, both to our clients and our own European equities franchise. Owning EuroCCP will also allow us to expand our business and bring to market a European derivatives business next year which we are very excited about. The other important point about EuroCCP is that, being EU-based, we view it a strategic asset in light of the political and regulatory uncertainty surrounding Brexit and the future framework of European capital markets.

 

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