Investors in Europe learned the hard way this month that key structural differences between some of the region’s main stock exchanges and their U.S. counterparts put them at a costly disadvantage when it comes to trading stocks.
On Oct. 19, technical glitches halted trading on two separate occasions, risking potential losses for investors that trade stocks on five of the six European marketplaces owned by
NV, including those in Paris, Amsterdam and Lisbon. The breakdown bolstered arguments for Europe to follow the U.S. and introduce a consolidated tape—an electronic system that collates real-time prices for stocks that trade on different marketplaces simultaneously.
Such a system, some market participants argue, would have allowed investors to continue trading stocks on alternative venues—including
Cboe Global Markets Inc.’s
Europe-based marketplace, the
London Stock Exchange Group
PLC’s majority owned Turquoise trading facility, and
PLC—despite the Euronext glitches. That is because the consolidated-tape prices would serve as a reference for investors to trade stocks on different marketplaces. Instead, when Euronext’s exchanges went down investors struggled to trade even the biggest corporate names such as Paris-listed luxury-goods giant
LVMH Moët Hennessy Louis Vuitton SE
Just Eat Takeaway.com
NV, a big food-delivery company, because pricing was unavailable or difficult to access.
A breakdown in Euronext’s platform risks disrupting trading across an increasing number of Europe’s exchanges given the pan-European operator is in the process of acquiring the Italian exchange from the LSE for about $5.1 billion. That deal would expand the number of trading venues it owns to seven.
The consolidated tape would save investors “billions of euros…provide better investment outcomes for investors [and] promote greater competition and resilience” among trading venues, said Niki Beattie, chief executive of Market Structure Partners and an independent, non executive chair at Aquis. Market Structure Partners, a U.K.-based consulting firm, in October published a report for the European Commission on the merits of establishing a consolidated tape. That followed a call in December from the European Securities and Markets Authority, the regional regulator, to establish a consolidated tape for stock quotes.
Euronext defends its technology, saying that its Optiq trading platform “has demonstrated reliability since its implementation in 2018.”
The trading disruption is one of two technical breakdowns in October involving a key part of Europe’s financial plumbing. A software glitch on Oct. 23 disrupted the European bloc’s main wholesale payment system, which prevented banks from processing transactions and securities trades for almost 11 hours. The European Central Bank said Wednesday it has taken steps to avoid a repeat of the disruption.
Currently, investors and their brokers in Europe would be required to subscribe to stock quotes from multiple trading venues to replicate a consolidated tape. However, this solution is costly, inexact, and raises the risk of missing out on the full view of available stock prices, some market participants say.
That structure showed its flaws when Euronext halted trading midmorning Oct. 19 for a few hours on most of its venues because of a software glitch. Many investors struggled to access an alternative venue to complete their transactions.
French food producer
had just reported earnings when Euronext Paris went down. Richard Worrell, head of equity trading for Europe, the Middle East and Africa at Janus Henderson Investors, knew the prices at which he wanted to trade the stock but couldn’t do so, either on another exchange or on private-trading platforms called dark pools.
“Theoretically there’s more choice in European trading venues than ever before,” Mr. Worrell said. “The challenge is that when the primary [market] goes down, all other trading seemingly ceases as well.”
A consolidated tape, proponents argue, helps overcome that challenge by offering investors one source for real-time quotes that would allow them to switch between marketplaces to trade a stock if one venue went down.
In the U.S., a consolidated tape protected investors when trading on the New York Stock Exchange froze for almost four hours in July 2015, said James Angel, associate professor of finance at Georgetown University. “All of the other exchanges kept trading and no one really noticed.”
Euronext takes a different view. The operator said in April that a real-time tape could lead to a “misleading sense of liquidity.” Euronext says disseminating a feed at the end of the day, not in real time, would better help investors identify the exchange that offers the best opportunity to complete their transactions. The mechanism would combine closing and best bid and ask prices with volume data.
Euronext’s technical challenges also highlighted the relative risks of trading in Europe as an increasing number of orders are executed during a narrow window at the end of the trading day.
Closing auctions are common among the major stock exchanges in the U.S. and Europe. They essentially bring together orders at the end of the trading day and fix a price at which the most trades can be executed.
Still, a heavier reliance on closing auctions on at least some exchanges in Europe suggests the fallout from any trading disruption would be more severe by canceling a greater number of trades.
A Global Asset Management Seoul Korea Magazine