Only 65% of turnover in the UK, Europe’s largest equity market, is actually meaningful and executable liquidity, with 35% consisting of ‘noise’, or reprints of already already-conducted trades. According to the Tabb Group in ‘Breaking Down the UK Equity Market: Executable Liquidity, Dark Trading, High Frequency and Swaps’, cash trading is further diluted by a plethora of execution channels, as well as alternative products, such as contracts-for-difference (CFD), and the true size of the investor market is masked by high-frequency trading.
The study sought to achieve five objectives:
- Demonstrate how much of the daily traded turnover is made up of meaningful, executable liquidity and what is just ‘noise’.
- Shed light on the make-up of the opaque, over-the-counter (OTC) market and help clarify the debate about this large part of the market.
- Determine how much of the UK market is conducted in the electronic dark market.
- Show the levels of activity among different market participants and establish how much turnover is attributable to high-frequency trading (HFT).
- Size the CFD market by determining how much UK equity trading is done on swaps versus cash and, therefore, how much equity trading is not subject to stamp duty.
As a result, Tabb estimates that while OTC-reported turnover accounts for 45% of the market, less than a quarter of it is executable. The balance is in fact comprised of reprints of already-traded turnover with 72% of executable liquidity being traded on the lit order book of an exchange or multilateral trading facility (MTF). Meanwhile, dark trading accounted for 11% of executable turnover.
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