By Rob Hegarty, Global Head of Market Structure, Thomson Reuters
As with so many things in our global financial markets today, the devil is in the detail, or perhaps in the definition. The growing complexity and volatility of today’s financial services industry does not come free of twists and turns. Yet, despite the changing times and unpredictability of the markets, we must avoid falling into the trap of distancing ourselves too much from the original meanings and nuances of particular concepts or notions that make our industry what it is today. Using terminology loosely may lead to unintended misconceptions or misunderstandings, and in turn, to mismatched conclusions. It seems, for example, that the industry has started to use the terms “regulation” and “market structure” interchangeably when clearly regulation is but one element that makes up market structure.
Market structure is a concept that has increasingly been subject to such potential confusion. And this may not be surprising because, as a term, ‘market structure’ is used, industry-wide, and the boundaries of its meaning are blurred. Its connotations seem ever changing. Just three years ago, a differentiation between trade and post trade market structure would not have been viewed as such. Today it’s the norm; even the requirement.
Traditionally, market structure – in any industry – describes the state of a market with respect to its competition. As a concept, it touches upon and is influenced by a wide range of market characteristics. In global financial markets major factors that continue to shape the market include: technology advances and innovation, marketplace and post-trade fragmentation, cost containment, fluctuating trading volumes and volatility, the need to deliver and enhance transparency industry-wide, and shifting global economic influences and regulation.
The way in which market structure, as a term, has been perceived through the years has varied widely and considering its definition is subject to market events, changes of focus in the industry and economic downturns, this should come as no surprise.
To a large extent, the 2008 financial crisis transformed the way in which market structure was viewed and addressed by the industry. The financial crisis set the stage for what was going to become, and still is today, the platform for a regulatory overhaul as has not been seen in financial services before. Post the days of the Lehman collapse, discussions around regulation inevitably gained ground and the need for greater market oversight took the industry by storm. In doing so, regulation also seemed to take over the vision of market structure itself, its connotations and even its definition. This is true to the extent that in today’s markets, and in the eyes of many, market structure has lost its traditional connotations and become a synonym for one of the most imperative and vital ongoing developments and discussions in the industry; regulation.
Far from being a synonym of market structure, as some market participants seem to be addressing it at the moment, regulation remains one of the most important drivers shaping market structure at the moment. The shift has been major. Prior to the days of September 2008, few would have mentioned regulation – let alone legislation – as a main driver behind market structure change. At the time, other factors such as (more…)