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While the RTS have yet to be endorsed by the European Commission and are subject to approval by the European Parliament and the Council, the regulatory direction is clear. Firms need to make traditionally opaque processes more transparent, and both buy- and sell-side firms need to reposition their roles, business models and trading strategies as a result. There will need to be a wholesale embrace of automated workflows – front to back – for firms to understand what their obligations are for individual orders at any given time during the execution process: pre-, post- and at-trade.
These obligations have added significance given that regulation is occurring at the same time as profound structural change within the European fixed income markets. Whether this is because of, or aside to, European regulation is up for debate; the reality is the world order axis already has begun to pivot. European investment banks are fighting to keep a seat at the table, choosing to realign capital to ensure they deliver a return on equity. This is changing both the products and services they are willing to offer their clients, as well as selecting which clients will be the beneficiaries.
This shift follows remarkable similarity to the juniorization of the equities desks post the European crisis of 2012; there, the loss of high-touch service provision led to a wholesale embrace of algo trading and dark pools, smart order routers and HFT. However, equities automation led to many outcomes that heads of dealing desks will not want to replicate, nor should they. Both the asset class and the time demand alternative responses.
While a true agency model is difficult to replicate without a central limit order book, the view that you will always need principle price makers to warehouse risk from non-matched trades misses the level to which technology and automation have also provided benefits to equity trading. The previous lack of transparency in equity executions has been radically enhanced by FIX trading and tagging of order flow. The requirement to deliver best execution has resulted in a flood of data, analytics and TCA offerings, with firms no longer focused on just gathering data, but gathering the right data to create meaningful output.