Doug Kerr, Goldman Sachs and Lee Bartholomew, Eurex discuss trading trends in H1 and their outlook for the rest of 2022 and 2023

Presented by Eurex.

Margareta Hricova Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investments. I am Margareta Hricova and joining me today is Lee Bartholomew, global head of fixed income and currencies at Eurex, Doug Kerr, head of rates futures sales trading europe at Goldman Sachs and Deborah Fuhr. Welcome to the show.

Lee Bartholomew Thank you for having me.

Doug Kerr Thank you.

Deborah Fuhr Thank you. So, Doug, let’s start off with what are the trends that you’ve seen in the first half of 2022?

Doug Kerr Straight out of the blocks we had the war in Ukraine, the removal of easy conditions, the recovery from COVID and central banks, increasingly hawkish rhetoric around supply based inflation. And what this did for us in our markets is generate extremely high volumes. We saw rates, markets coming alive globally, a large increase in options activity and block activity, which had previously been relatively quiet, particularly in Europe, where we’ve seen, you know, a decent build in boom bubble shafts, option activity and your riber activity as well. We also saw a real focus on commodities due to the supply based issues. We saw, you know, the start of a supercycle and concerns over energy supply and what that also generated was a sell off in the equity markets and also a capitulation in crypto markets as well. We saw volatility increase and liquidity concerns on the back of that. So as markets sold off, particularly in rates and curved bear flat and particularly in the U.S, we saw, you know, a pullback in liquidity and in futures markets, particularly some difficult environments. In the midst of this, we saw the resurgence of macro funds, some strong performance there and also in the CTA environment, whereas, you know, some others struggled, particularly with heavy equity exposure and crypto exposure. The main kind of themes of the year were inflation versus growth. That was the real struggle for central banks over the first half was to balance, you know, how they reacted to the inflationary environment versus maintaining growth in our particular industry. We saw further consolidation as certain counterparties dropped out and we saw the expansion of disruptive technology and the continued electronification of our markets. We saw the use of algo’s increasing algorithms to execute, taking into account liquidity and how difficult it was to execute certain sizes so a big increase in the use of algo to get traded on.

Deborah Fuhr Lee, central banks are facing a dilemma. What does this mean for Europe?

Lee Bartholomew I personally don’t think we’ve seen the last of the inflation in terms of the numbers, right. So there’s always a lag in the numbers. And therefore, as we head into the winter, then you’re likely to see that knock on effect on people’s disposable income. We have seen a lot more volatility, so you see a lot more intraday volatility in futures, not just the absolute level or rate at which we get to. I think it’s the velocity that we get down. I think that’s on the minds of central banks and I think the market is probably been underestimating how much central banks need to do to put a lid on inflation and then the growth factor. Right. And one of the interesting facts is I don’t think you necessarily seen the fallout and credit yet either. So I think a lot of CapEx spending in the US has been absorbed right now and kind of masks potential for further declines. What does that mean for rates? I think well, rates in Europe is definitely the leading in terms of volumes. So we’re seeing strong growth across the portfolio in futures and options. I think options though from the start of the year was elevated regardless of the event risk that we had and that’s been maintained throughout the course of the year so far, then it’s a position in terms of duration, right? So a lot of people switched out long duration into short duration. You’ll likely see that continue with fixings going higher basis widening. Also, I think with the way cash markets are trading relative to futures as well, that will continue to impact markets. Technology has allowed markets to become more efficient and what you see is a lot more slicing of orders. Also, those algos are there competing for that liquidity. Right. So you do see a times recalibration as you see large market moves. And that then plays out in terms of the intraday that we’re seeing. So I think from a central bank, it’s the pace at which they accelerate and give guidance to the market and then how they temper that with both.

Deborah Fuhr Doug, what is your outlook for the second half of 2022 and into 2023?

Doug Kerr The cost of living squeeze is going to really impact politics, particularly in Europe as we’re seeing, you know, right now. So, you know, we had peripheral elections lined up for next year. We’re now looking at Italy sooner than that. So, you know, it’s going to really come to the fore. What will be interesting is to see what happens with crypto markets, whether there’s a revival there, and also what happens with the volatility that we’ve seen in markets and the subsequent liquidity drain. It’s something that we look at very keenly at the firm in terms of stepping in to provide mainly principal liquidity on blocktrades and futures and that kind of thing. But there’ll be, you know, continued electronification of market. We’re looking at streaming, EFPs, EFSs, that kind of thing that may come in and also increased activity in the listed derivatives wrapper. So whether that’s through credit, through FX, crypto, you know, fixed income, ESG, all these areas are something that, you know, we’re relatively excited about in terms of building our business and being able to offer liquidity to clients. And I think another element we’ll be keen to watch out for is disruptive technology and how hard that angle is pushed and how regulators react to that in futures markets.

Deborah Fuhr Thank you. And Lee, from your perspective, what are the three critical things investors should be watching out for in 2023?

Lee Bartholomew I think definitely you can’t ignore inflation, I think that has to be up there. Digitization. So I wouldn’t necessarily bucket that in with crypto, I think there’s plenty of volatility in cryptocurrencies, but I think you’re going to continue to see digitization become more and more prevalent and then that also has its impact in the exchange world. So you kind of see in those markets we evaluate in terms of the valuations, you’ll see, I think, consolidation in that sector. So that’s something that you will look to do. How will they then look to maybe challenge some of the incumbents in the traditional exchange sense with barriers to entry? I would say lowering as the exchanges themselves, as they become more digitized, whether that’s workflow or products and so forth. And then I think you’re going to get the electronification. And for me, what should be on investors minds is what electronification means for them, their portfolio and liquidity. Because I think it’s very fungible across the board and especially when you think how long can you continue to have this volatility if you then start to see a sharp deterioration in growth? As we know, growth takes three to six months, I would say, to lag in the data. So you would expect at least Q1, Q2, 2023 to be at these elevated levels. And by that, I mean, I’m doing that from an exchange perspective in terms of our overall volume. For June alone, we were trading north of 3 million contracts a day. Is that sustainable? You would have probably said question mark in previous years because you tended to see kind of exaggerated measures and then it dropped back into tighter range. But I think this year as being the exception, you’re likely to see that in Q2.

Deborah Fuhr That’s great. Thank you both for sharing your insights with us.

Lee Bartholomew Thank you for having us.

Doug Kerr Thank you.

Deborah Fuhr Thank you to our sponsor, Eurex, and, of course, to all of you for watching. To watch prior episodes and to see news from the ETF industry visit us at Thank you.

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Published on July 27, 2022