A report by the New Financial think tank, in partnership with Goldman Sachs, suggests that European markets are stronger than they might seem. The total level of addressable liquidity is more than twice the volume available on the primary exchanges once other types of trading such as that on multilateral trading facilities, systematic internalizers (firms like Goldman Sachs providing principal liquidity to clients), over the counter, and off-book, on-exchange trading are taken into account, the report finds.

Eleanor Beasley, head of market structure and chief operating officer for Goldman Sachs’ EMEA equities business, says that this means market participants must look beyond the electronic order books of national exchanges (or the “lit primary” market).

“If you’re an investor, a corporation, or a trader, and you’re only looking at the lit primary market, you’re now only going to see 30% of reported trading volume, and you’re therefore going to massively underestimate what is available,” Beasley says.

The task of assessing market efficiency and liquidity levels has taken on renewed importance as policymakers discuss how best to develop Europe’s markets, including by increasing the participation of retail investors and changing the way pension funds invest in the region.

We spoke with Beasley about the state of European stock markets and how they could evolve from here.

How are firms adapting to Europe’s changing stock markets?

The market today is based on information. Generally speaking, the more information you put into the marketplace, the more you’re going to show your intentions and the worse your performance will be.

In the last few years, we’ve seen a sizable shift in the participants in European capital markets, with a growth in the amount of trading flow that comes from principal trading firms or non-bank liquidity providers.

We’ve also seen a change in the way people invest. The rise of index investing means that less volume is traded throughout the trading day and more volume goes into the closing auctions on the primary exchanges.

And the fact that companies are staying private for longer means that there are fewer companies listing on public markets.

All of these things have changed the way we trade—with good reason. Lit markets are becoming a smaller part of the liquidity landscape as investors look for alternative trading mechanisms that offer better execution quality with a lower risk of revealing their intentions to other firms in the market.

For example, Goldman Sachs provides significant amounts of principal liquidity to our clients by internalizing their orders and therefore minimizing the amount of information leakage into the market. Seeking to provide the best execution for our clients is front and center to what we do, and in 2024 alone we provided over €1 trillion of principal liquidity in European equities to our clients.

Firms are also investing in technology like smart order routers and liquidity-seeking algorithms which can help them access all the available pools of liquidity and make decisions in a rapidly changing market.

There’s a huge amount of innovation happening in the European markets very quickly. Keeping pace with these changes is critical and it’s no surprise that firms are adapting.

What would make European markets more competitive?

From a trading perspective, European equity markets are working well. It’s a highly competitive marketplace, and there are commercial forces at play which ensure that innovation wins. To protect against any degradation in the quality of the market, it’s absolutely crucial that participants who are conducting like-for-like businesses are supervised in the same way and that standards across the marketplace remain high.

Regulators are also working on consolidated tapes in both the EU and UK—a central record where investors can see the total volume traded in any given stock alongside the best bid and offer in a name. The US market has had something similar since the 1970s, and having our own mechanism to consistently and accurately display liquidity in the region will be key to improving the perception of European markets.

Moving away from trading, there is absolutely space for reform in Europe’s post-trade clearing and settlement environment, which is very inefficient compared with the US. Europe has 17 central counterparties for clearing and 31 central securities depositaries for settlement across 31 different countries. The US has only one central counterparty for clearing and a single central securities depositary.

This siloed post-trade landscape generates a huge amount of frictional costs, complexity, and overheads for operating in the region. The report from the New Financial think tank finds that post-trade costs are between 50% and 100% higher in Europe than in the US market.

Who will benefit from the consolidated tapes?

Much of the innovation we have seen across Europe over recent years has happened away from lit order books, meaning that volume is often being missed by market participants and observers. We need a way to see all of the activity executed across the different trading venues and mechanisms.

A consolidated tape helps everyone who uses the market. Investors need it to work out their asset allocation, trading firms use it to size their orders depending on the amount they think they can successfully trade, and corporations’ view of the liquidity in a market is a key driver when deciding where they want to list. If anyone is only looking at 30% of the volume—the liquidity on the primary exchanges—then they’re going to think that liquidity in Europe is much lower compared to other regions.

If we want to have a serious discussion about how European markets compete on a global stage, the very first step is to work out the total traded volume.

How do you think market structure will evolve from here?

European policymakers have been trying to bring down the cost of trading in the region, and they’ve been successful in achieving that objective. MiFID II introduced greater competition among trading venues in 2018, which has in turn stimulated innovation. As a result, the European marketplace offers a lot more choice in terms of the variety of mechanisms we can use to execute a trade and achieve the best outcome for our clients.

Over the coming months, we’re likely to see some level of reform around retail investing as policymakers try to increase the currently low levels of retail participation in European equity markets. We think that any reforms in this area need to be focused on ensuring that retail investors are serviced in the same way as institutional investors and, importantly, that they get access to all pools of liquidity across the region.

It is key that standards remain high as new market models, structures, and participants emerge—we  know that’s a key focus for regulators. Beyond that, my hope is that European regulators recognize the value of stability. The European marketplace has already seen a huge amount of change, and our industry has worked hard to ensure that investors and market participants understand how to engage with the “new” market structure, where the different pools of liquidity are, and how we trade. In my view, further enhancing that understanding regionally and globally will promote growth.

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