as they have proved to be a strong force in other parts of the world. Another point is how the survey was limited to just those in Europe. We have no participation from those trading into Europe who are located outside of Europe, however large or small an input they may have. A final point, is that this is not a survey of the whole of the European derivatives industry, just the listed derivatives. This part makes up a small element of the whole, including OTC, derivatives markets (2)
.
Whilst all these points I see as valid, it does not take away from what is after all, a useful gauge of sentiment among many significant industry participants. I will now take a look at some of the key finding that the report brought up.
GLOBAL AMBITIONS!
Both buy-side and sell-side firms saw growth in Europe but many were looking for greater growth in the next 5 years outside of Europe, in the U.S. and Asia. The U.S. is a developed, growing & homogenous market of its own and I suspect riding on the coattails of the growth of the U.S. with derivatives in Europe sounds a good idea and I think that is a reasonable assumption…but don’t forget the retail trading component in this picture. Additionally, looking to develop business in the Middle East also sounds reasonable as many on the buy side located there such as prop trading firms already access European markets. However, Asia is not a homogenous marketplace, such as the U.S. or even Europe. I question how far these would be a lure to locals there to trade into Europe, especially when there are pretty good local markets in China, India or even in Latin America. These are just a view on a few of the points.
REGULATORY HEADWINDS! I can quote directly from the report (1)
here ‘ There is a
broad consensus across the market that the alphabet of European regulations has created a major burden for the industry.’. Sometimes, the piece just writes itself…and you don’t have to add anything else!
BREXIT AFTERMATH! Here’s another quote from the report (1)
. ‘Most
participants (both sides) see Brexit as having a negative effect on London’s position as a global financial centre and predict that Paris will be the European financial centre with the greatest growth potential over the next five years.’. The actual numbers benefitting from Brexit were…Paris 45%, London 18%, Frankfurt 12%, Amsterdam 11%, New York 7%, Dublin 5% & Madrid 2%. A key element in all this would be how far UK rule-making diverges from EU rules and vice versa. In this, the impact of Brexit on London as a financial centre saw 31% remain as a major financial centre with
Overall, this survey gives a snapshot window into how some key participants in Europe see the industry developing over the next 5 years. I will be interested to know if when the next report is produced, say in another 5 years, will we still be seeing the same problems…or will we have new ones, with some of the things seen as important now, diminishing if not disappearing completely.
Eddie Tofpik E:
eddie.tofpik@
admisi.com T: +44(0) 20 7716 8201
6 | ADMISI - The Ghost In The Machine | Q3 Edition 2024
significant growth potential, 51% remain…but with a diminished size and influence and only 18% seeing London shrinking. I believe these questions were asked before the recent change in Government in London and the recent impasse in forming a Government in France.
CYBER RISK!
This was identified (…and in my opinion, rightly so) as the single biggest risk the industry was facing, coming ahead of regulatory risks & profitability and quite a way ahead of risks in markets, operations, political, liquidity and credit risks. Interestingly, climate risk came last! The ransom-ware attack on ION was highlighted but profitability risks to principal trading firms and regulatory risks overall also showed, though it appears most support the objectives of regulation…just not some of its unintended consequences.
GROWTH OPPORTUNITIES!
It is unsurprising that the greatest growth potentials were seen in futures and options based on interest rates, as this is by far the largest segment of derivative contracts in all markets (2)
. The widely seen
largest segment of the commodity markets – energy – was also seen as having growth potential. However, some liked crypto and carbon, in that order with more than two thirds engaged or planning to engage in crypto and slightly less than two thirds doing the same to carbon. Then we have an interesting area… Retail! Here growth was seen…but the biggest percentages were 39% for some growth and 31% for little growth. The big area for growth here is seen still as US options markets from Europe with reasons being cited as education, structural factors, fragmented markets, popularity of OTC products and competition from more lightly regulated jurisdictions…all of which sounds reasonable.
EFFICIENCY VS. INNOVATION!
Here views varied quite a bit. Clearers & sell side firms prioritised efficiency gains in new technology, whilst principal trading firms & exchanges are more interested in new technologies such as Blockchain and AI…so overall…nothing new there!
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