European Equity Market Structure 2.0

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PETER HAYNES: Welcome to episode 46 of TD Securities' podcast series Bid Out-- a Market Structure Perspective from North of 49. I'm your host Peter Haynes, and today our guest is one familiar to this podcast series. Niki Beattie is President and CEO of Market Structure Advisors in London. And she returns to our show for the second time to update our listeners on market structure developments on the other side of the pond from North America. Niki, thanks for returning to our show, and I look forward to our discussion.

NIKI BEATTIE: Thank you for inviting me, Peter. Looking forward to having another chat.

PETER HAYNES: So just housekeeping as always, before we get started. I want to remind our audience that the podcast is just for informational purposes. The views described in today's podcasts are of the individuals and may or may not represent the views of their firm. And, of course, the content of this podcast should not be relied upon as investment, tax, or other advice. Well, Niki, a lot has changed since we last spoke in January of 2021. I recall at that time you were working your way through Brexit. You were just starting out on the journey on a consolidated tape, which I know you had a lot to do with and you guys were revisiting some of the MiFID rules that have been subsequently changed. I am curious. Today is June of 2022. What are the most common topics of conversation in current discussions with buy-side investors?

NIKI BEATTIE: There's no doubt about it at all that the consolidated tape is still the dominating conversation from everybody's perspective, really. That is for sure the most top of mind for people. I think beyond that, there's a lot of discussion around the impact of Brexit and the divergence potentially of the UK from the EU. And that really involves dark pool treatment, things like the double volume caps where dark pool trading was restricted through EU rules, but the UK is diverging from that; a relaxation in the UK on the share trading obligations, whereas in the EU, they still want to make sure that all trading undertaken by EU investors and EU-issued stocks happens on an EU venue. So it's restricting where people can trade, whereas the UK is moving away from that. So that's definitely a topic of conversation. Payment for order flow, Robinhood and everything has happened since then. It's increased the conversations in Europe, and that people are now making a significant noise around that, although I hear much less about that from buy-side investors. There's more regulators. And one of the interesting things that is a little niggle in the side at the moment, but increasingly a conversation, is the potential regulation of technology platforms that bring buyers and sellers together. So I'm talking about the likes of technology vendors who are not actually MTFs, but provide a lot of RfQ-type processes, mainly in the non-equity world, that are in their minds bilateral, but in the regulators' may be doing multilateral, which means that basically a whole load of technology vendors may have to become regulators as trading platforms. That's relatively one coming from left field at the moment.

PETER HAYNES: And that is the same left field that caught the equity world in the United States off-guard with Reg ATS, and all the rules they were putting in place for Treasury trading. And the reading of the technical tea leaves inside that 600-page document, people started to think, hey, this impacts vendors. This impacts people sending out IOIs. And all of a sudden, are all of these different entities going to have to be regulated? That is certainly a high-profile regulatory file that's wide open and being commented on. I'm not surprised that that conversation is bled into Europe in the same way. So let's dig into some of these topics that you just mentioned. I'm going to start with the consolidated tape. There has been talk lately of adding pre-trade information to the consolidated tape, rather than it simply being a post-trade consolidated tape. Can you update our listeners on where this discussion has come from, and the likelihood that you end up with essentially-- we'll call it a SIP equivalent, although I don't want to be too comparative to the US?

NIKI BEATTIE: So yeah, Peter, maybe it's worth saying for your listeners that my firm was the author of the report for the European Commission in terms of investigating whether or not we should have a consolidated tape. And the overwhelming majority of people that we spoke to in that study, and the recommendation we made to the European Commission, was that free-trade data should be included. And so we made that recommendation in 2020. So since then there's been a lot more discussion, and it's still up for grabs although the negotiations are closing in on where that might land. As you might anticipate, the key opponents to such a move are the exchanges that feel they stand to lose revenue. And so they are still lobbying the policy makers and saying that a pre-trade tape is not necessary. But the buy side and the sell side, generally-- the trade associations have just come out last week and put their thoughts forward. The majority of stakeholders are basically saying, look, we need a pre-trade tape, and it's crazy that we don't get one. The politics are standing in the way of it. So we're in the process of that negotiation right now, and nobody really knows where it's going to land.

PETER HAYNES: OK, so is there a mechanism, should the pre-trade tape be put in place, for the exchanges to sue the EU for putting this rule in place, in the same way that exchanges sued the SEC around the transaction fee piloted more recently around market data?

NIKI BEATTIE: So it's an interesting question. I don't think the legality is working quite the same way. But I think there is a possibility that the exchanges could say, this is our IP and you can't do this. So they could challenge on an IP basis. We don't really have the same way of, as I understand it, in the US, where firms can sue on certain legal structures that have been put in place in different things. So this would be very much-- in Europe it would be about the IP of the data. It wouldn't be a natural process coming out of regulatory decisions, if that makes sense.

PETER HAYNES: It does. The European market has always been a BestEx market. And actually, I personally prefer that model to what we have in North America. But as you add a pre-trade consolidated tape potentially to what's available to the market, it leads to potentially a move to an order of protection rule. Has anyone talked about that as part of a move to a pre-trade tape? I hope you don't go there, but I'm curious if that discussion has come up.

NIKI BEATTIE: So I hope we don't go there. I think most people don't understand what the order protection rule is. So the debate at the moment is all around whether or not best execution should be measured according to the consolidated tape. And that naturally leads to a discussion around order protection. So we haven't had the second part of that discussion. The first part is currently going on about, well, should this tape be mandated? If so, what's it been mandated for, and what does that really mean? And so most people don't understand the consequences. Similar consequences are what do you do with odd lots when you start getting into this type of environment? And should we have five levels of data instead of one level of data? So most people who haven't been in the weeds of this haven't yet come to those discussions. But right now there is quite a lot of discussion about this being linked. And in fact, ESMA the European regulator, put out a note saying this should be linked to best execution. My view is a consolidated tape and best execution can still be linked, but not in a mandated manner. So if you have to demonstrate best execution, you would say, well, OK, I'm pointing to the fact that I looked at the consolidated tape, and this is where I found my answers. It doesn't mean it has to be mandatory. It doesn't mean we have to have an order of protection rule. We've got a lot of other complications in the European market structure, like multiple clearinghouses and things like that, that would make it much, much harder to have those sorts of things.

PETER HAYNES: Yeah, it's dangerous sometimes to look to other marketplaces to say, hey, that's how they do it in Australia or Brazil or Canada. Why don't we do that here? And yet on the surface that might sound like a good idea. But when you dig in, you realize structurally we're very different. The one aspect of the consolidated tape that's remained a bit out there was, first of all, who's going to produce it, and what's the cost of the production? I know I read the report in terms of what the suggested cost was that you had come up with. Who will produce it, potentially? What will they charge for it? And probably, most importantly, what about the latest on who gets to share in those revenues? Because originally, it was a puck hog by the exchanges, and they were the only ones that--and the way, that's a Canadian expression, sorry, that the exchanges were the only ones that were going to be able to participate in that rev share.

NIKI BEATTIE: So if I go back to our recommendation in 2020, it was that this should be a utility-run organization with some sort of partnership with the regulators and some sort of empowerment to fine and penalize people for poor data, et cetera. The European Commission has not gone down that route in their recommendation. They have suggested that there should still be competitive tenderers-- sorry, not just tenderers, but there should be competitive consolidated tapes. If you have competitive consolidated tapes, it makes it much harder to enforce rules, et cetera, enforce standards. So personally I'm still struggling with how that's going to work. Our own view, when we recommended it was a utility was that it would be much easier then to assess what the revenue would be coming into one place, and how that might be shared out; and that the utility organization itself would be made up of governance of both-- well, of all types of stakeholders. So you'd have buy side, sell side, and exchanges in there. And they would have to come to some agreement between them as to what this would be sold for and how the revenues would be allocated. Again, because European Commission has recommended that we have these competing providers, it's not clear to me how revenue would then be distributed, et cetera. So the European Commission's idea is that there has to be inequities, that there would have to be some sort of guaranteed revenue to the exchanges to make this acceptable to them. Now, I think most of the people who want to run these consolidated tapes are just quite simple technology companies. I don't actually think they have the balance sheet to start guaranteeing revenue to exchanges, et cetera. So I think there's a million flaws in what the European Commission have put out. And maybe again, just to remind listeners, European Commission is the executive arm or the civil service of the European Parliament. And so the European Commission itself is only making recommendations. What's happened now is that's gone to the policymakers-- so, the politicians themselves. And that's all being debated and negotiated in Parliament. So there are some politicians that believe that we shouldn't have competition in consolidated tape, and there is still some discussion around that. The problem again is I think most people don't understand the real details of what does this really mean. So competition sounds like a good idea, but potentially, it won't be. So in answer to your question, we don't really know. This is all still to play for. But I think the discussion that's on the table around competition would make it very hard to share revenues and come to some sort of an agreement about a workable solution. And it makes me lose hope for the fact that we will ever get a viable consolidated tape.

PETER HAYNES: Well, the story's not over, here. So all you're doing, Niki is making me have to invite you back down the road so we can finish this off. And I do, again, appreciate your time today. So just before we move on to some of the other topics, you mentioned about divergence on dark caps. I know that under MiFID there was the double-cap rule-- 4% on one marketplace, no more than 8% dark on all marketplaces. And then there was a rule change proposed. Did you just say that that's only-- that single cap is only proposed for the UK, or did the EU also propose a single-cap rule? Maybe you can update us on where that divergence is happening between the UK and Europe.

NIKI BEATTIE: So basically, the UK is relaxing all of the rules around volume caps. And actually, ironically, the EU is going in the opposite direction. So EU is actually-- they're trying to restrict dark trading not only through maintaining the volume caps that are out there at the moment, but tweaking them. They're also going to put restrictions on the use of the reference price waiver, things like mid-point trading for SIs, and also the share-trading obligations that I spoke about earlier. The UK is really looking at getting rid of all the double-cap restrictions that are out there at the moment. So this is probably the biggest area of divergence between the two.

PETER HAYNES: But meanwhile, MiFID proposed a switch from the double cap to a single cap on dark trading in total of 7%? Is that correct?

NIKI BEATTIE: Yes, that's right.

PETER HAYNES: Is that in place yet, or when will that be in place?

NIKI BEATTIE: No, these are all proposals at the moment.

PETER HAYNES: OK, so later 2022 we can anticipate that these rules, assuming they get approved, would be implemented?

NIKI BEATTIE: Yes.

PETER HAYNES: OK, you mentioned bilateral facilities, different names and different places. So I'm just going to walk through a little background on that. So on that particular topic in Europe, Europe has what are now known as Systematic Internalizers, or SIs. And they've received a lot of attention in North America, these types of venues, and arguably led to the creation of similar bilateral facilities in the United States. A recent report by BestEx Research, Hitesh Mittal's firm, suggested that trading with bilateral facilities or single dealer platforms in the US was subject to a high degree of information leakage due to segmentation of flow. The BestEx report suggested that single-dealer platforms offer so much savings to algo execution costs that neither the dealers or the single-dealer platform operators want to study whether these leakage concerns are valid, because the current structure is mutually beneficial. Do you hear similar concerns about systematic internalizers in Europe, and can you update our audience on the growth of these platforms?

NIKI BEATTIE: So yes, we definitely hear similar concerns. So there's always this trade-off between, I think I'm getting a better price over here because it's a bilateral conversation, versus there's some sort of information leakage going on. And so that is very much at the heart of many of the discussions around the systematic internalizers, and whether they're good for the market. The systematic internalizer market is definitely growing. That worries the EU. I think the UK are much more relaxed about that. I just want to be really clear, though, when I talked about multilateral versus bilateral systems. So in a way, a systematic internalizer is already considered to be regulated, because they have certain obligations on them as a recognized systematic internalizer. The people who are worried that they may become regulated are not the people who are systematical internalizers themselves, or the single-data-platform-type organizations. They're actually like the order management venues-- or vendors, sorry. So it could be something like an Aladdin or a Charles River that might be impacted by this sort of regulation that they're trying to bring out.

PETER HAYNES: Well, in the United States, these single-dealer platforms aren't regulated, and there's some concern about that. I would argue a single-dealer platform in the US acts exactly the same way as a systematic internalizer in Europe. In fact, generally speaking, they're the same organizations. One's regulated-- systematic internalizers in Europe-- and the other one isn't, in North America. And I know that's completely separate from the vendors that you're referring to.

NIKI BEATTIE: Yeah, so you're right. So a systematic internalizer here and a single-data platform are very similar. But we have a clear regulatory definition around that, and you don't. And therefore there aren't the obligations on the STPs in the US that there are here in Europe.

PETER HAYNES: So I understand that systematic internalizers are represented about 4% of consolidated volume in Europe. And then there's periodic auctions which are being operated by various venues. I guess some of them are similar to the systematic internalizers. How do these periodic auctions work? How big is the flow on those venues, and who are the major providers?

NIKI BEATTIE: OK, to answer the question backwards, so the major providers are actually the big exchanges doing the periodic auctions. And in a way, that was their way of counteracting some of the SI flow that was out there, and giving people confidence that they could not have the same information leakage that they might have during continuous trading. Then there was a lot of issues around the fact that they were just taking midpoint prices. And therefore, what were they really doing? And this is why the EU has moved to tighten up on things like the use of midpoint trading. And so generally, that's been accepted as not really very good behavior of these periodic auctions. So people are trying to tighten up around that. And so other than that, what can I tell you about how they work? Do you have periodic auctions in the US and Canada?

PETER HAYNES: No, they're pushing towards that. There's been various proposals. There are certain ATSs that use periods, are being proposed. But generally speaking, when you're talking about milliseconds, what's the difference between continuous and auction? I realize milliseconds matter for a certain segment of the market. But if I understand correctly, it's generally like every 100 milliseconds there'll be a match in XYZ periodic auction. Is that the process for how it works? Is that the typical time series that you're looking at?

NIKI BEATTIE: So for some of them, yes. Some of them have a longer time period. And then you get into issues such as-- so some of these auctions, they call themselves auctions, but they're not really displaying the data about what's going into the auction at the time. There's a lot of discussion about are these really auctions, or is this a way of people just getting their business done by doing a cross in this periodic auction and actually the same broker being on both sides of it. So there's a lot of consternation about what constitutes good behavior in a periodic auction, versus poor behavior. And I think the exchanges have not been completely transparent about what's happening in the auctions, even by not providing the volume and pricing information about what's going into the auction, for example, because for them, it's a way of protecting. It's a newfound business and they thought they were going to lose business to SI and OTC market. But they're reluctant to really run them in a way that we think of as normal auctions on an exchange. So there's a lot of discussion about that.

PETER HAYNES: If I understand again, the numbers are something like 4% of consolidated volumes and periodic auctions. So you have foreign systematic internalizers, foreign periodic auctions. Now we're talking about a significant part of daily volume. With regulators wondering whether these SIs and the periodic auctions actually ARBing the rules that they put in place for dark trading in Europe, is it possible that there will be rule changes around these types of venues?

NIKI BEATTIE: Yeah, look, I think that's exactly why the EU have actually tightened up on a lot of the things that are going on. So the big question is, does a periodic auction actually-- should it go into the double-volume caps, for example? So whether or not you agree with whether a double-volume cap should exist, is this not dark trading in another word? And therefore, why isn't it contributing to the dark-trading volumes, rather than saying it's a lit market, when it clearly isn't? So there has been some guidance published particularly by the UK FCA around periodic auctions and how they should work. And that has improved behavior and the mechanisms, and made them more transparent. But I still think there's a long way to go. And certainly, if you're going to be introducing them in North America, I think you really need to be, or the regulators really need to be, thinking quite hard about that. What is this type of behavior? What is it that people are expecting? Because they're happening on, ostensibly, exchanges, people just think this is part of a lit market. And so it's become a bit of a joke, because it's not really. That's why I'm saying you have to work out, is this constituting a lit market volumes, or is it really in the dark market? And what does that mean?

PETER HAYNES: I think the short answer is it is an ARB of the dark rules. I think we all understand that it's a matter of whether the regulators can catch up. We can all agree maybe the dark rules didn't make sense in the first place. But the rules are there, and next thing, everybody tries to find ways around them. So I understand that there's a possibility of what Europe might call a grand bargain. And that has to do with rules around payment for order flow, and a trade-off with the consolidated tape discussions. So why don't you just walk us through payment for order flow? Hot button topic in the US, as we are all expecting the SEC to soon publish a rule proposal that may include a ban on the practice, and along with some form of limitation, potentially on exchange rebates. SEC Chair Gary Gensler frequently points to the ban on payment for order flow in the UK and Canada as precedents for a potential ban in the US. I always personally get angry when I hear Gensler say that remark about Canada, as marketplaces in Canada with inverted fee structures replicate off-exchange payment for order-flow economics, and these markets have 25% of daily volume traded on their venues. Nevertheless, there has been a lot of chatter about PFOF in Europe. Some countries want it banned. Others want it codified as a legal practice. And some participants want a grand bargain. Run us through the latest on this topic.

NIKI BEATTIE: So what do you mean by a grand bargain?

PETER HAYNES: The grand bargain I'm referring to is the potential that the rules around consolidated tape by the exchanges will somehow be traded off against in certain countries are suggesting that maybe if you're going to ban PFOF, then you're going to-- like Germany, for instance, they're suggesting maybe if you ban PFOF, you take back some of the suggested rules around consolidated tape, because Germany might want to be protecting their primary venue, the Deutsche Boerse. That's what I'm referring to. I thought there was a possibility of some sort of grand bargain. Is that accurate?

NIKI BEATTIE: Yeah, no, you're right. That is right. So sorry, it was just the terminology that I wasn't familiar with. But it's interesting. So if I go back two years, payment for order flow and the consolidated tape were not really being linked at all. And now what we find-- so I talked earlier about everyone sitting at the negotiating table right now. The European Commission have put out their plans around a consolidated tape which had nothing to do with payment for order flow. And then suddenly, at the negotiating table, the lobbyists for the certain different markets and the policy makers are all suddenly having the conversation about the consolidated tape and the PFOF together. So you're right. So your observations about the UK, for example, as a place that bans payment for order flow, it absolutely does. It doesn't so much have a codified ban around what you call the inverted marketplace on the exchanges in terms of rebates. But it frowns on rebates, and it doesn't like those sorts of exchange models. Various countries in Europe have banned or haven't banned payment for order flow. So Germany, for example, allows it to happen, as you just said. And they also allow rebate models for exchanges. So it's quite a mixed bag of opinions around payment for order flow. ESMA, the European regulator have basically come out with guidelines saying, really, it shouldn't be happening, but they don't actually have a lot of teeth. The main discussion is around this post-trade data only. So if we go back to the consolidated tape discussion for a moment, the exchanges have conceded that the battle is half won, that we can't not have a consolidated tape. But the least-worst scenario for them is just post-trade only. And they're saying that actually, if you only have a post-trade-only tape, it's sufficient for us to be able to track payment for order flow, and we can do whatever we need to do around the payment for order flow discussion. And therefore, that's a good reason to have post-trade data only. We don't need any of this pre-trade stuff. I find that quite a convoluted sort of discussion that's being had at the table. I have to say it's mainly the Germans that are pushing now, and saying that payment for order flow should be legitimate. And one could be cynical, because they have a number of burgeoning retail-trading platforms that are doing quite well, and therefore feeding the German financial markets and the exchange itself. That whole conversation has just become quite confused, to be honest. Like I said, it's at the negotiating table right now. It's not really very clear where that's all going to end up.

PETER HAYNES: There was an article in the last couple of months that put a-- I'm not sure exactly what market it was, maybe you can explain this to us-- where at least in one marketplace brokers were paying post-trade costs-- or the exchanges, I should say, were paying post-trade costs, and that was viewed as a form of payment for order flow. Was that in Germany, or where was that? And it was something to do with the typical article in the US paper, payment for order flow, despite what some people say, is alive and well in Europe. Was there a specific example around that that you can think of?

NIKI BEATTIE: I don't know. There were two academic studies. I don't know if you were referring to that. So the Dutch regulator put out an academic study that said that payment for order flow made prices worse for investors. And the German-- well, actually, it was an academic study sponsored by Trade Republic, which said exactly the opposite. So you could be a bit more cynical that that was paid for by Trade Republic, although the academics say it didn't impact their thinking. I don't know if those are what you're talking about, or whether there was something different out there.

PETER HAYNES: I'm not sure, but the Trade Republic, to be clear, that's like a Robinhood in Germany. Is that correct?

NIKI BEATTIE: Yeah, that's absolutely correct.

PETER HAYNES: So you talked earlier about how there's some divergence between the rules that are coming out in the UK versus what's being followed in the EU. And that's what's followed here, a few years removed from Brexit. So I'd like to talk a little bit about Brexit in terms of who now you might view as clear winners and losers.

NIKI BEATTIE: Do you mean in terms of market participants under Brexit?

PETER HAYNES: Yeah, either market participants, but maybe more specifically around the exchanges. So as I've read recently, Euronext Amsterdam is winning the IPO battle with the LSE. I view that as really almost a shocking development. Why is it that Euronext Amsterdam has been so successful relative to the LSE? And would you put that sort of category of winners and losers as Amsterdam winning and London losing?

NIKI BEATTIE: If we talk about the primary markets, if I go back 10, 20 years, many firms that had national listings in the European markets ultimately came to London and listed there, because the pool of capital in London was just increasingly-- for the whole of Europe, London was really winning that pool of capital. And that's where the expertise was. I think now one that's been political pressure on national champions-- so if you take something like Royal Dutch Shell, for example, they're under pressure, I think, from politicians to move. But also, the pools of capital are now being more fragmented across Europe, and they're no longer just sitting in London in one place. So it's less attractive potentially to list in London. And I think the truth is as well-- so you ask more broadly about winners and losers. Because of the share-trading obligation, which we discussed earlier, which is the obligation that requires anybody who's within the EU to trade an EU stock on an EU exchange or MTF. So for example, if it's a French-issued stock, and you're an EU investor sitting within the EU, you can't trade that in the UK, for example. So in a way, that liquidity has moved back. Well, it definitely has moved back to within the EU. But people like Cboe have created their own entity in the EU, even if the LSE has its own entity in the EU. So the capital and the trading has moved, but the people who have ownership of that liquidity are the same characters as we knew before. I think the other thing that's happening as well is that obviously there's a now fight for clearing in the EU. And although from a derivatives perspective it's quite hard to just shift clearing from an equity cash market perspective, a lot of that business has just moved back into EU clearinghouses as well. So right now it's looking like EU markets are the winners but not in any one place. It's not just Holland. It's France. It's Germany. Every market I think has benefited a bit and the UK has lost out.

PETER HAYNES: For the benefit of North Americans who may not be paying as close attention, pressure for Royal Dutch Shell to re-domicile from London I assume is coming from the Dutch government to try to relocate its primary listing in Amsterdam. Is that what the goal of that discussion is?

NIKI BEATTIE: Yes. I'm not party to whether or not that's actually true, but you could imagine that politically you don't want that post-Brexit. You want your national champions back in your home market.

PETER HAYNES: I know it's not that simple to re-domicile, though. There's a lot of tax issues, I'm sure, that go into that type of discussion before it can actually happen. So I listened to a podcast recently about the new London Stock Exchange Group, or LESG. And it's clear to me that Refinitiv and FTSE Russell, which are subscription-based parts of that entity, are the darlings of this consolidated firm. Is there any chance or any rumblings that the London Stock Exchange Group might actually sell the LSE?

NIKI BEATTIE: Well, I speculate upon that myself, but it's not a rumbling that I've heard elsewhere. And I certainly don't think right now that's what they're thinking. But longer-term, you can see where that world is going to go. The LSE has swallowed this enormous whale from the Refinitiv business. And so it's dwarfing the LSE exchange business in itself. The exchange businesses have got much lower margins. The LSE didn't really succeed in creating a derivative business. So it's still very much a cash-equity exchange. And so you can just see it becoming a less important part of the whole of the London Stock Exchange Group. And people are going to divert resources and do things in different places that the LSE itself might suffer. And at some point, they have to run it as a separate regulated entity, which is costly in itself. So at some point, you might imagine that people would just say, why don't we just spin this off?

PETER HAYNES: It would be the exact same discussion that ICE might have about the NYSE in the US. I wouldn't say it's something that would be relevant at the TMX, because it's still primarily, or I should say mostly dominated by its trading presence in Canada. But these are massive political issues. And if I'm a government, I'm not sure I'm really happy that our center of the capital universe for our country has now become a bit part of a larger organization. That's concerning. I wouldn't be surprised if politicians in the UK and in the United States and other places might not necessarily be happy in the long run.

NIKI BEATTIE: On the one hand, I agree with you. So I think what the UK has always been very good at, and one of its great strengths, is that it's always been open to competition. So the LSE obviously is the icon in the UK markets. But in actual fact, I think at the last count, there were like 45 MTFs in the UK. There's a lot of other exchange and trading platforms, and the LSE is very open to it. So unlike when we were talking about the share-trading obligation earlier, the EU, through creating that shared trading obligation and forcing people to trade on the platforms that are only within the EU, in a way, it's not a very open mindset. It doesn't lead to innovation. It starts to lead ultimately to stagnation at the exchanges. So the UK does really well because it's encouraging. It creates an environment where it's encouraging alternative and competing trading platforms. I think the thing that I find a great mismatch is I keep reading about the UK's digital strategy, and we're going to attract new listings, and we're going to be the place for fintechs to list. But all they ever do is talk about the London Stock Exchange. And so politicians themselves haven't really understood that they've got this quite vibrant other market that they could encourage. And maybe they should stop going and asking the London Stock Exchange for everything when they're trying to make policies, and realize that the LSE is such a small part of that business. So the thinking isn't really joined up, but the environment that the UK creates is a good one for alternative venues.

PETER HAYNES: Well, I remember a wise former senior executive in Canada was once asked a question about the competition of the TMX when Alpha first was launched back in 2007 or 2008. And this person, again, I would say wisely said, be careful what you wish for. If Alpha is too successful, you could potentially harm the brand of the TMX, which is brand Canada. And I always thought about that, actually, when I was watching Alpha grow. And obviously, we have competition with other markets here in Canada. But you don't want to, at the end of the day, it's in everyone in Canada's interest to make sure the TMX brand remains very strong. One of the interesting things the LSE is doing is they're moving their data center from just outside London to Italy. I'm wondering. It's going to add some latency to round-trip messages, at least back to the city. Is anyone upset about this decision?

NIKI BEATTIE: I certainly haven't been part of conversations where that really dominates. So I think people are getting used to the fact, certainly with Brexit, that we're going to have data centers in different places. And the people who really care will just co-locate in Italy, I think. So I don't really think that's a big issue for people.

PETER HAYNES: Here's an issue that was heavily chatted about prior to the pandemic, and that was potentially shortening the European trading day from its current eight and a half hour session. The LSE sent out a survey asking participants about several different options to adjust the regular trading session. I recall that the overwhelming feedback was in favor of a shorter regular session, although there were a bunch of different options that were provided. Is there any chance that this topic resurfaces?

NIKI BEATTIE: I think definitely. I would say it has gone quiet during the pandemic, because everyone was working from home. So it has changed people's perspective. But I have heard rumblings of that conversation resurfacing, and people still wanting to champion a shorter working day.

PETER HAYNES: Well, I would agree with that. Hopefully, it is something that ends up continuing to be on the front burner. Let's switch gears here, just as we're about to finish up, to a recent high-profile exchange event that happened in the city. The London Metals Exchange, or LME, is in the cross-hairs of intermediaries after its decision to cancel, rather than let stand or reprice, runaway trades in nickel just after the war in Ukraine started. This was obviously a well-publicized event. To me, this entire event was avoidable had the exchange paid attention to global market structure convention changes, and added price band limits to its nickel and other metals markets, like most equity markets, including NASDAQ, Nordic, the TSX, and the US exchanges did following the flash crash. Why did the LME get caught flat-footed in this recent nickel squeeze?

NIKI BEATTIE: So I think the LME has not modernized its whole-market model for quite some time. I think we've all observed, and it's vacillated towards keeping the floor and going to fully automated markets. It just hasn't had a culture of what we know as central limit order books and trading in the way that we know. And look, let's face it, I'm not excusing it. For where we are in 2022, the LME's structure just looks completely archaic. But at the same time, it took us having a flash crash to put in place things like the circuit breakers, et cetera. So we didn't have those before. Yeah, so they've had-- what?-- 14 years or something to consider what happened then and to amend their markets. But I guess it's just a different culture. It's a different group of people involved. The other thing that I find quite interesting is the LME itself is saying, well, it needed the OTC data. It didn't have information that it should have had, et cetera. But that leads me back to the whole consolidated tape discussion where we began, is, well, who needs what data to do their job? And part of me says, well, the LME, why should they worry about the OTC data? It's not their problem. But if they needed it, then it would be much better if we had data consolidated in one place. Yeah, there's a lot of water to go under the bridge with that one in terms of investigations going on at the moment, and a lot of angry people.

PETER HAYNES: Is there a potential outcome? Certainly, some of the intermediaries have suggested they're going to leave the exchange. And obviously, intermediaries are very important to any trading ecosystem. But is there much of a thought in London or in the city that the LME may have harmed its brand to the point where competing marketplaces may be able to come in and capture some of their products?

NIKI BEATTIE: Massively. I think the CME and ISO are well poised to come in and do that. And it's a great shame, but sometimes it requires a crisis for people to wake up and smell the coffee. There's probably been too much compromise to appease people who didn't want to modernize the exchange in the past, and this is where it's led to. So I think absolutely, this has been incredibly damaging for the LME brand.

PETER HAYNES: You know what, it's probably not too late for them to fix that. I really believe that. So hopefully, they will heed the advice of people that are saying they need to modernize. So let's finish up. On your market structure advisor's website. You advertise your expertise in digital and crypto markets. Personally, I've been resisting becoming a crypto market structure expert, but clearly, you haven't. Are you a believer that crypto and equity market structure will converge, and that eventually, every security will be traded in token form? NIKI BEATTIE: OK, so yeah, so one, I don't claim to be an expert. I'm not sure anyone's an expert.

PETER HAYNES: The 22-year-old that sits beside me that's my partner who just came out of university, he's an expert, or as close to an expert as there is. It's that generation. For us, Niki, it's going to be tricky.

NIKI BEATTIE: That generation are experts in certain things. And I find the interesting thing-- so if you listen to the FTX deposition to Congress, et cetera--

PETER HAYNES: Yeah.

NIKI BEATTIE: --what these guys are really good at is understanding the retail market and the crypto-trading market. But translating that into an institutional marketplace, and understanding the market structure and the reason we have certain market structures in place for institutional market, they're not experts in any of that. So in answer to your question, do I believe everything is going to be tokenized? Yes, I think everything will be digitized. I believe all assets will be digitized. It doesn't matter whether it's securities or houses or cars. Everything will be digitized.

PETER HAYNES: How long?

NIKI BEATTIE: Five to 10 years. What I say at the moment is we've got a bit of the Wild West going on out there in terms of the crypto exchanges and the crypto market. So we've got people calling themselves exchanges and custodians of assets and whatever. But they are not in-- they don't fit into our current regulatory thinking in what we believe is a custodian, or even what is an exchange. And I think we're at the crossing point where everyone talks about decentralized finance. But what is decentralized finance? And can it just completely and utterly exist in a world without any sort of service offering around it, and any sort of comfort to people? And I think we're going to find a hybrid in there where traditional finance and decentralized finance are going to have to merge into some sort of hi-fi environment. And that's where I think the guy who sits next to you who is a specialist in, I don't know, digital exchanges or whatever, actually he's got a lot to learn, and you've got a lot to learn from him. And now we've got to-- there's been a bit of a shakeout in the market. And I think we're going to have to have a bit of a meeting of the minds. And they realize that actually there's a lot of things they don't know that is going to need to further the cause going forward. And there's a lot of things that we probably all need to learn as well. But I think the main point is that we will solve for that by solving for some of the issues in the crypto markets. It doesn't matter whether you believe in the future of cryptocurrencies or where it's all going to go. I think the problems we have now need to be solved in crypto markets. It seems like risk management, custodial-- are you really a custodian? What's the balance sheet behind some of these things? Because if institutions want to get involved, we have to solve for that. And when we solve for it in the crypto market, it's going to be 24-7, et cetera. None of our current market structure can deal with that. So when we solve for that in the crypto market, we will ultimately solve what the new market structure is going to look like for everything that we deal with today.

PETER HAYNES: I echo your sentiments 100%. And I want to say this with the-- I got to find the right words here because I don't want to be offensive. But when you look at stocks like GME, the cinema company in the United States, that have become so-called meme stocks, they're trading at valuations that have absolutely nothing to do with reality. GameStop, obviously, is GME. And they're allowed to do that because there's no institutional ownership of those names to actually create price discovery that has some rational mind to it. It's really the exact same thing in crypto. Once the institutions become involved, pricing will become rational. It has to. And I really and truly believe that is the catalyst to somehow move everything to tokenized trading, to figure out where cryptocurrencies fit into the overall fiat currency world and governments. And it'll be really interesting to see how that plays out. Hopefully, you'll agree to come back. I don't want to say, or dare not say, that we're going to be talking more about crypto than equities. I don't think that'll be the case. But perhaps we'll include another discussion on crypto developments. And you can update us on Europe, and we'll provide you a perspective on North America. And I have to give Canadian regulators credit. They're working very hard to rein in and regulate crypto platforms that are operating with Canadians. And I'm really quite impressed with how they've handled things. In fact, there was the first application for an ATS, which is essentially a marketplace to trade crypto in Canada, which was filed a few weeks ago by Coinsquare-- unrelated to Coinbase. They're just similar names. And funny enough, a lot of the people involved in Coinsquare are former ITG Canada executives. So they grew up in the equity world, and are now in many ways leading some of the decision-making that's going on at an ATS that's going to focus on cryptos. That's more to this whole convergence thought process, I'm sure.

NIKI BEATTIE: I think what we're now seeing is a lot of people with experience moving out into this market. And they're going to bring to the market what a lot of-- it's been started up by the younger generation. But I think it's meeting-- we're already seeing a shakeout in the market. I think people are realizing to grow these businesses and to expand into institutional markets, you have to do something different. And you need to employ that sort of experience. So there's a massive amount of that going on. I do believe to solve for these things, you're going to have to take some of it out of the current market jurisdictions and regulations, because the problem is the regulations are not made for this right now. So you almost need to solve for this outside of the jurisdictions. I don't like the idea of things not being regulated, but that's where we've got to right now. And then you bring them back into the regulated environment, and the regulations have to adapt accordingly. I think the EU is similarly working really hard on its MiCA regulation, which is all around crypto markets and digital assets. I think the UK is further behind, actually, in terms of working out where things should be going. So that'll be interesting to watch. I definitely like to call it digital assets, though, not just crypto, because I think crypto narrows the field about what this is ultimately all about.

PETER HAYNES: Yeah, I completely agree. And I will say that the Coinsquare ATS application was five pages long, and people were saying, well, a typical ATS application is probably 500 pages long. But the reality is that the regulators are creating a bit of a wide landing area to start with. And I figure over time they'll rein things in. So I think their approach is somewhere in that middle range that you talked about. So thanks a lot, Niki. It was a great discussion, a great update. And I look forward to speaking with you again down the road.

NIKI BEATTIE: OK, Peter. Thanks a lot, and a pleasure speaking to you.

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