Citadel Securities, US-based trading firm, has recently opened trading hubs in Paris and has been authorized by the German government to trade its Bunds. This is a particularly important move in a continent whose major participants had usually been local financial entities, while resisting opening up to foreign investors and especially aggressive high-frequency traders.
Critics have argued that high-frequency traders can make capital markets more fragile, leading to a deterioration of liquidity and a rise in short-term volatility. The International Market Association has recommended caution given the current rise of “volatility of volatility”, i.e., the speed at which markets become volatile, due to automation and e-commerce, among other developments.
On the other hand, European-policymakers have started to recognize the need to overhaul the European bond market. In fact, it is one of the pillars of Mario Draghi’s plan to boost European competitiveness. Moreover, the European Securities and Markets Authority is in the process of registering and publishing the prices of all bond trades throughout Europe, likely aiming to attract foreign investors.
Although a revitalization of Europe’s capital markets is needed, policymakers and financial entities should be cautious about foreign trading entities engaging in excessive speculation. This calls for proper regulation while simultaneously strengthening domestic financial entities. In sum, Europe should aim to take advantage of more open international capital flows while developing a robust and distinctly European bond market.
Author: Luis Cabezas