FCA pledges to cut back limitations for specialist buying and selling firms | USAEMALL.com

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The UK financial watchdog has hailed how specialist trading companies have transformed Wall Street markets and pledged to ease access for such firms in London by tailoring regulation for them to boost liquidity.

Nikhil Rathi, chief executive of the Financial Conduct Authority, said smaller trading firms, such as market makers, were “too often” restricted by capital rules that were designed for large global banks.

Speaking at an FCA capital markets conference in London on Tuesday, Rathi said the agency was examining ways to “reduce barriers to entry for specialised trading firms that don’t hold retail deposits”. 

“Just look at the way non-bank traders are now capturing flows across US equities,” Rathi said, calling this a “massive shift, in the space of just a few years”.

Many of these specialist traders, such as Citadel Securities, Virtu Financial, Jane Street, Susquehanna International Group and XTX Markets, have reshaped Wall Street’s trading landscape. Using faster technology and more advanced analysis, they have elbowed aside investment banks to dominate buying and selling on the world’s capital markets.

“Tailored regulation for these specialised firms sparks growth and competitiveness, while protecting market integrity,” Rathi said, adding that customised rules for specialist firms could “free up capital, and new entrants”.

“We have to nurture liquidity,” he said. “Liquidity keeps us agile.” Rathi signalled a shift from a central tenet of traditional financial market oversight, saying: “The old approach — ‘same business = same risk = same treatment’ — no longer fits today’s financial landscape.”

“We are challenging long-standing principles to seize the opportunities in this age of predictable volatility,” he added.

Financial markets were hit by a sharp sell-off in early August following weak US labour market data and speculation about interest rate moves, although they quickly recovered. But Rathi asked: “Did we get lucky?” He said regulators were “still piecing together exactly what happened to understand if there are new systemic risks needing deeper examination”. 

Rathi added a big concern was the concentration of trading activity in a few large companies. “Investment management is increasingly centralised in the largest firms,” he said. “This heavier reliance on fewer firms means disruption — from earnings, regulation, or geopolitics — can trip the global market.”

The UK needed “a new mindset towards risk”, he said, citing the FCA’s reform of listing rules to encourage pension funds to invest more in riskier assets and reducing the requirement for companies to issue a prospectus when raising more capital. 

The regulator is under pressure from the Labour government to show that it is doing more to take account of its secondary objective to support growth and competitiveness, which was introduced last year under the previous Conservative government.

UK chancellor Rachel Reeves will this month send a formal “remit” letter to the FCA around the time of her October 30 Budget, calling for it to prove it is acting to promote the expansion of the UK financial services sector amid a push to boost Britain’s growth rate.

Rathi said to “create an environment that helps firms compete and grow” the regulator needed to “shift from reactive, to proactive regulation . . . and a system guided by good outcomes, not just rules for the sake of it”.

“The goal of regulation shouldn’t just be to step in when things go wrong, or respond to a crisis,” he added.