Equity Trends in Europe

Navigating the future of European equity trading: a strategic perspective

In the rapidly evolving world of European equity markets, institutional investors face various challenges. Regulatory shifts, technological advancements, and a fragmented liquidity pool are redefining the trading landscape.

This leads to a high demand for innovative solutions that enhance efficiency and protect market participants. At Vontobel, we are committed to leading the charge with a suite of tools designed to safeguard our clients’ interests and optimize execution.

In this article, we delve into two transformative trends reshaping European equity trading: indications of interest (IOIs) and trajectory crossing. Backed by our in-house-developed smart order router (SOR), called PULS, and our cutting-edge Trading Analytics Platform™ (TAP), we ensure that our clients remain ahead of the curve in an increasingly complex market.

Actionable IOIs: certainty in execution

IOIs have long been a cornerstone of liquidity discovery, but their evolution into actionable IOIs has transformed the trading landscape. Actionable IOIs are firm commitments to buy or sell securities at predefined prices and quantities, providing unparalleled certainty and speed in execution.  

Key features:

• Execution guarantee: Once a match is identified, the trade is executed immediately, reducing the risk of unfilled orders. 
• Automation: Integrated into an SOR, actionable IOIs ensure seamless, real-time trade execution without manual intervention.
• Liquidity access: Having access to actionable IOIs within your execution management system (EMS) maximizes the fill rates of your working orders. 
• Individual quoting: Quotes matching the client’s needs in line with the management of the allocated risk capital. 

Trajectory crossing solutions: a new era in scheduled trading 

Trajectory crossing solutions are shaking up how large orders are executed by leveraging predictive analytics to match scheduled trading volumes at benchmark prices, typically using a volume-weighted average price (VWAP). The essence of trajectory crossing lies in its ability to anticipate price movements along a trajectory and execute trades when optimal market conditions are met. 

While the trajectory crossing service started to take shape in the mid-2000s and has been around for some time in other markets such as the US and Canada, it has only recently begun to be adopted in Europe, bringing a fresh approach to crossing large orders. The first exchange-operated trajectory crossing service for European equities was launched in Q4 2024. Currently, as a buy side, you can get this service from the sell side on the street. 

How it works:

• Participants submit non-actionable IOIs with details such as quantity of shares, liquidity transfer rate (LTR), and the limit price.
• The trajectory crossing service uses benchmark trades on major European venues to calculate VWAP over the duration of these trades. 
• Orders are crossed at the VWAP price as close as possible.

Benefits:

• Precision: ensures execution at or near the benchmark price, enhancing alignment with trading objectives. 
• Protection: minimizes the direct market impact of the order. 
• Cost efficiency: reduces implicit trading costs by eliminating spread costs, particularly for large orders. 
• Liquidity discovery: aggregates liquidity across multiple venues, increasing the likelihood of optimal fills. 

Challenges:

• Lack of guaranteed completion: The lack of guaranteed completion within strict time frames may result in partial fills or missed opportunities for time-sensitive trades. 
• Complexity: The complexity of such an order and the different implementation details within the market are usually a general downside of new technologies.
• Support: Direct support for the buy side comes with huge investment and maintenance costs. Support from the sell side on the street might come with additional costs and take some time. 

A disruptive new way of executing orders is only as good as the users who adapt and understand this system. The service will only establish itself when there is a critical mass that believes in it and uses it in a “non-actionable” form. This means that users must classify this service very opportunistically and must never give up wanting to use it. Trajectory crossing is not without its risks. Institutional investors must weigh all the factors carefully when integrating it into their strategies. Will “trajectory crossing” establish itself in Europe? We don’t have an answer to that yet, we'll have to wait and see.

Informed decisions through comprehensive market analysis

In today’s increasingly fragmented European venue landscape, it is no longer sufficient to base order routing solely on price priority. Many venues now offer executions at European Best Bid and Offer (EBBO) levels or better, often with low or even no fees.

To act in the best interests of and protect institutional and retail investors, these four pillars have to be taken into account:

1. Price improvement: For every order sent to the market, analyze order book snapshots at the time of order arrival. This data identifies whether a venue offers price improvement relative to the primary market.
2. Firm quotes: Assess execution attempts for quote firmness, measuring whether trades receive the expected price and quantity.
3. Quote presence: Evaluate quote frequency throughout the trading day. The more often a venue provides quotes at or better than the primary BBO, the more important such a venue becomes. This approach ensures better liquidity access, which is even more important for less liquid instruments.
4. Venue toxicity: Each order, whether filled or rejected, comes with a toxicity score, representing both temporary and permanent market impact.

Aggregating these scores produces a venue’s overall toxicity rating.

Staying ahead: Vontobel’s approach

At Vontobel, we pride ourselves on precision and foresight. Our robust market analysis and innovative trading solutions ensure that every order is executed with strategic clarity. Whether through IOIs or our market evaluation framework, we deliver tailored scalable solutions that empower institutional and private investors in an ever-changing market.

By incorporating actionable IOIs into the SOR platform, Vontobel enables clients to navigate fragmented liquidity pools with confidence, leveraging cutting-edge technology to deliver superior execution outcomes.

Our market analysis framework evaluates execution quality across different venues. Looking at different pillars and not only at price improvement is paramount to our best-execution policy. Normalized facts on a scale of 0 to 1 and averaged into a final score builds the cornerstone of our routing decisions. With this approach, we have built a system that optimizes execution quality for our clients, while we have also created a competitive marketplace for all sorts of liquidity pools. By optimizing the share of volume a venue receives, the best possible result will be achieved for all involved participants.

As European equity markets continue to evolve, Vontobel remains steadfast in its mission: to protect and empower all sorts of investors with robust, data-driven solutions. Our commitment to innovation and execution excellence ensures that our clients remain ahead of the curve - today and tomorrow.