Despite this, the contribution of lit primary venues to addressable volumes (liquidity that traders can actually interact with) remains robust. But for investors to get a true picture of available liquidity, they need to look at all trading mechanisms, including off-book trading, which contributes 40% of addressable liquidity.
This is a challenge for Europe. If global investors only look at what is traded on European lit primary venues, they may think Europe’s stock market is less active than it really is, particularly as it competes with other market centres like the US.
“A misunderstanding of Europe’s total trading activity is affecting how investors allocate their money, how big their orders are, and how they manage risk in the region,” Beasley explains. “If you’re only seeing a fraction of the trading that is actually taking place, you’re going to undersize the activity that you’re doing in Europe.”
The consolidated tapes could also make market data cheaper to access, lowering the cost of doing business in Europe for all market participants.
Will the consolidated tapes mean more IPOs in Europe?
The consolidated tapes could also help European companies by making it easier to raise money from investors, according to Bertie Whitehead, head of Corporate Broking at Goldman Sachs.
This is because international investors are less likely to commit money to European companies if they only have a limited view of the liquidity—a key risk metric for portfolio management—across the region.
Investors, like pension funds and asset managers, have liquidity thresholds dictating how much capital they can allocate to a region depending on the level of liquidity. Investors who underestimate trading volumes across Europe may bypass investments to the region.
Whitehead says he has been advising clients in Europe to include in their investor relations deck the volume of their shares that are traded on an average daily basis to show that they are sufficiently liquid. “That’s an important element of their investment case,” he says.
A single record of liquidity across the region would help companies demonstrate to global investors that their stocks are more liquid than they might appear based on the trading activity on stock exchanges alone.
This, in turn, could help encourage companies to use Europe’s capital markets when they need to raise money. One of the attractions of US exchanges for foreign companies is the appearance of having significantly more liquidity than their European or UK counterparts. “That’s just based on wrong data,” Whitehead says.
In fact, when you compare liquidity in Europe and the US after excluding shares that are not available for public trading, the levels are comparable, Whitehead says. “Global market capital is like air: It flows everywhere.” Seen that way, he adds “the lure to the States isn’t quite as spectacular as you might imagine.”
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