Debt-funded share trading will recover sharply this year and the equity market rebound has further to run, Deutsche Bank AG's head of equities for Europe, Middle East and Africa said in an interview. This year there has seen a steady increase in the amount of trading using borrowed assets, Kerim Derhalli told Reuters.
"We're seeing that creep up again. In Europe leveraged used has gone up by a third since January 1, but it has a lot further to go. It could double from current levels in the next year," he said, but declined to give details on the volumes traded.
Share dealing using borrowed funds fell off a cliff after the demise of Lehman Brothers decimated the availability of credit for speculative trading. Derhalli said that leverage would not go back to pre-crisis levels due to higher volatility and less credit being available. He said he also saw strong reasons for continued growth in European stocks on top of the 35 percent rally so far from multi-year lows hit in March.
"Fundamentals, technicals and valuations are all helping the market and I think it can extend and it could be the beginning of a new bull market," he said.
"The market struggles to go down, the sell-offs aren't sustained. I think we can get a 10-15 percent rally from current levels by the end of the year." The appearance of new trading platforms and the shift to a more automated trading environment will make it more difficult for incumbents like London Stock Exchange to hold on to their dominant positions, Derhalli said. "Exchanges have become relatively less important; I suspect that over time with increased competition their quasi monopoly positions will erode somewhat," he said.
"There will be more competition and the market will become a little less concentrated than it is."
Equity trading is likely to follow a similar path as foreign exchange, which is largely transacted via electronic platforms, Derhalli said.
The vast majority of foreign exchange trades are carried out online, while equity trading still relies to a much larger degree on broking via telephone.
But Derhalli said that equity is following foreign exchange on to automated and electronic trade, pointing out that 50 percent of Deutsche Bank's equity trading volume in Europe is electronic, up from around 25 percent a year ago.
"That's been one of our single biggest successes in Europe recently, attracting the highly sophisticated algorithmic type trading which is what's driven our market share to be more dominant."
While this won't lead to a big drop in the number of traders, it will lead to a radical shift in how equities desks operate, Derhalli said. "The model is changing in equities. Our research sales people are going to become increasingly portfolio advisers and consultants and the sales traders are going to become execution consultants, giving advice on the best way to trade liquidity on the market," he said.
"The execution function is going to become more automated and commoditised and that will free-up sales traders to advise clients on the best way to access markets and for traders to spend more time risk mnaging rather than executing."
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