The FCA is committed to reducing barriers for specialist trading companies

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Britain’s financial watchdog has hailed the way specialist trading firms have transformed Wall Street markets and pledged to make it easier for these firms to access London by tweaking regulations 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 big 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 specialist trading firms that do not hold retail deposits”.

“Just look at how non-bank traders are now capturing flows on US stocks,” Rathi said, calling it a “massive change, in 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 the trading landscape on Wall Street. Using faster technology and more advanced analytics, they have pushed aside investment banks to dominate the buying and selling of the world’s capital markets.

“Tailored regulation for these specialized firms fosters growth and competitiveness while protecting the integrity of the market,” Rathi said, adding that tailored rules for specialized firms could “free up capital and new entrants.”

“We need to cultivate liquidity,” he said. “Liquidity keeps us nimble.” Rathi signaled a shift away from a central tenet of traditional financial market supervision, saying: “The old approach – ‘same business = same risk = same treatment’ – no longer fits today’s financial landscape.”

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

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

Rathi added that a big concern was the concentration of trading activity in a few large companies. “Investment management is increasingly centralized in the largest firms,” ​​he said. “This greater reliance on fewer firms means disruptions — due to earnings, regulation or geopolitics — can hamper the global market.”

Britain 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 reduce the requirement for companies to issue a prospectus when they raise more capital.

The regulator is under pressure from the Labor government to show it is doing more to deliver on its secondary goal of supporting growth and competitiveness, which was introduced last year under the previous Conservative government.

The UK Chancellor, Rachel Reeves, will this month send a formal “remission” letter to the FCA around its October 30 Budget period, demanding that it demonstrate that it is acting to promote the expansion of the UK’s financial services sector amid a effort to stimulate the growth rate.

Rathi said that “creating an environment that helps firms compete and grow” regulators need to “move from reactive regulation to proactive regulation. . . and a system guided by good results, not just rules for their own sake”.

“The purpose of regulation should not just be to step in when things go wrong or to respond to a crisis,” he added.