The European Securities and Markets Authority (ESMA) published a report Wednesday that looks at the performance of European securities markets, risks, and trends, as part of its task to monitor systemic risk. Overall, the report finds that securities markets and investment conditions in the European Union (EU) improved in the second half of 2013, based on better macro-economic prospects. This, in turn, contributed to reduced systemic risk in that period, it notes.
However, the report also indicates that risks remain high for EU securities markets “as reflected in by the rapid propagation of uncertainty from emerging markets countries to EU markets early 2014.”
“Stress in EU securities markets has decreased, but key markets and investors continue to face substantive risks. As we remain vigilant about monitoring these vulnerabilities, global re-pricing risks as well as a better understanding conduct and operational risks will be a particular concern going forward,” said Steven Maijoor, chair of ESMA.
The report also looks at high-frequency-trading (HFT) in EU equity markets, which finds that HFT activity accounted for around 22% of the value traded and for 60% of orders. Overall, HFT seems to be positively related to volumes traded, fragmentation, prices and tick sizes and negatively related to volatility, it says.
It also looks into the impact of the current phase of low interest rates, concluding that “it encourages investors to favour particular asset market segments such as fixed income products.” In terms of risks, the reports identifies revaluation, liquidity and additional counterparty risks once the low interest rate environment comes to an end.