Mayeet Hudson

Market structure change over the past decade has been directly or indirectly catalyzed by the credit crisis of 2008. It can be argued that everything from cryptocurrency to swaps clearing to ETFs saw change and/or growth due to the market’s reaction to the near collapse of the global economy 10 years ago. That post-credit crisis era, however, is now over. Easy-money policies around the world are coming to an end, interest rates are rising, volatility is returning, and what felt like endless market upswings are no longer assured. And now that trading desks have senior vice presidents who were still in school when Lehman Brothers failed, the path forward is not about how it used to be, but how it should be now. With that in mind, and in no particular order, these are our Top 9 Market Structure Trends for 2019:

1 - Volatility Tests New Market Structure

Despite some short-lived spikes, volatility has remained relatively low for the past decade, as markets have risen and the U.S. Federal Reserve injected more and more stimulus into the economy. While this has been great for retirement accounts, it hasn’t offered a prolonged test of the new post-crisis market structure. That means major portions of Dodd-Frank, EMiR, MiFID II, Basel III, and other large-scale legislative and regulatory changes around the world—all intended to reduce systemic risk—have had barely a chance to prove their true worth.

While we are certainly not predicting any major market calamities in 2019, we fully expect market volatility to stay with us. This will also include general uncertainty among market participants, increased volumes across the board and varied methods of risk-taking and hedging—some of which will end poorly. As a result, today’s market structure, which looks and feels vastly different than it did 10 years ago, will be forced to prove that it has, in fact, made markets better and safer.

2 - Exchanges Grow in Importance (and size)

In Q4 2008, CME had a market capitalization of $7 billion. ICE’s market cap at that time was $4 billion. A decade and some acquisitions later, CME’s market cap is now $65 billion, and ICE’s is $46 billion. That equates to growth of roughly 1000%. While not every exchange group saw such dramatic gains, the importance of exchanges around the world has grown tremendously, and 2019 will see them advance even more

The growth of ETFs and new exchange-listed and cleared derivatives will certainly help, as will further consolidation. But the real gains in 2019 will result from the push into two areas outside of their traditional sweet spots: products traded OTC and the sale of index-related products and data.

Spot foreign exchange, government bonds and corporate bonds have been at the center of several acquisitions over the past years (i.e., NEX Group, InteractiveData, BondPoint, TMC, FastMatch, 360T—need I go on?). 2019 will provide an opportunity for the exchanges to bring those purchases to the next level, with a wide range of new product integrations, trading methods, clearing solutions, and data offerings further cementing their critical place in the capital markets ecosystem.

The Death of Libor

In the wake of the rates manipulation scandal, Libor will effectively be dead in just two more years. SOFR and SONIA, among other benchmarks, are slowly starting to find their way into new contracts and debt issuance around the world, as the market is finally accepting and dealing with this enormous change.

The impact of this on market structure goes beyond the $350 trillion face value of financial products currently tied to Libor. Hedging vehicles will need to change, making some existing futures and swaps products less useful, and the exchanges will all fight to take control of new SOFR and SONIA contracts. Existing contracts need to be renegotiated as well, creating a huge operational burden for the industry that will consume legal and operations teams for months to come. In the long run, the industry will adapt and move on, but the short-term fight to change will be intense and meaningful.

Read more on https://www.greenwich.com/equities/top-9-market-structure-trends-2019

Mayeet Hudson

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Top 9 Market Structure Trends for 2019