It was a little note in a Greenwich study that raised a fascinating topic for those interested in market structure. When evaluating causation of dwindling volume in European fixed-income electronic trading, the report mused out loud about the potential for the market to have reached its “natural limit.” Understanding this level, and recognizing how and where to calculate it, is what makes markets and moves prices. But in the big-bank dominated world of European fixed-income electronic trading markets, while the markets may be at a temporary calm point, the shuffling of brokerage leadership hasn’t changed much.

 

By Banco Carregosa (Own work) [Public domain], via Wikimedia Commons

With MiFID II and a new credit cycle approaching, European fixed-income electronic trading could get hit with a storm

“Whether due to low levels of market volatility and trading activity, or the approach of some natural limit, growth has stalled in European fixed-income electronic trading, and volumes have hit a plateau,” said the Greenwich report titled “Stability in European Fixed Income May be Short-Lived.”

The market stability that has recently blessed European fixed-income trading has been a welcome respite after years of “post-crisis tumult.”

But that calm that traders might be experiencing just might have a storm brewing right beyond the horizon.

With MiFID II approaching, which requires bulge bracket banks to separate the cost of client benefits such as research from commissions charged to customers, this is one reason that market calm “could prove short-lived.”

But it’s not just allowing research costs and trading commissions to be divorced that might be causing the return to volatility, but also a shift in the credit cycle might be at work. With interest rates set to rise in the US and lag but follow in Europe, volatility, the market maker’s friend, might be storm clouds that are starting to appear.

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