[ I N D E P T H | R E G U L A T I O N ]
about an inaccurate reference price caused by too much dark trading .
Fragmented markets These diverging approaches to different market mechanisms and venues on either side of the channel following Brexit means in the not too distant future market participants could be forced to navigate a fragmented liquidity landscape , which in turn will bring several other hurdles to overcome , including increased costs of trading and a less inclusive trading environment .
While dark trading , systematic internaliser , and FBA volumes in Europe have not increased astronomically , they have grown . From the first quarter of 2018 , addressable market share excluding prints above LiS and outside of market hours across these three areas in German blue chip stocks grew from 8 % to 15 % in the fourth quarter of this year , according to data published by big xyt .
If the UK makes itself the more attractive place for these volumes to trade then a portion of them could be forced out of the EU and back onto UK venues , much to the dismay of the pan- European trading venues who set up European branches in a bid to accommodate the shift of EU share trading post-Brexit . Said venues with dark books would be the short-term winners , however , ultimately fragmentation will lead to higher costs for everyone . Worse still this liquidity could be pushed out into third countries meaning it ’ s a lose-lose for both the UK and Europe .
“ I never believed that business could ever come back to the United Kingdom , but this is an extraordinary football match because in some ways it looks like the European Union could also be making a spectacular own goal of themselves if they are too stringent against the liberalised market ,” says Haynes . “ What happens is some of the liquidity is shipped back to London and a large liquidity pool is divided and everybody loses , everybody ’ s a loser there because spreads will widen and markets become less liquid . It is better to have 100 % of a particular market in a single place because that is where you get most liquidity .”
What ’ s more , with EU investors limited to where they can trade by the share trading obligation ( STO ) – also scrapped by the UK – diverged and fragmented markets also have the potential to exclude a large portion of these investors from certain pools of liquidity . Around 80 % of institutional order flow in Europe is international , meaning they ’ re not bound by Europe ’ s STO and could take the party elsewhere .
“ Suddenly you may have an EU asset manager unable to access the liquidity that ’ s taking place on EU venues between other global asset managers and
“ If the UK liberalises so much that price discovery becomes meaningless and we end up in a marketplace that looks more like the foreign exchange market … it could be creating a problem that shifts more business back to Europe .”
ALASDAIR HAYNES , CHIEF EXECUTIVE OFFICER , AQUIS
it all starts to get very tricky ,” adds Exton . “ Then you get the potential of Europe reacting to that and the creation of ‘ fortress Europe ’.”
Increased trading costs A fragmented liquidity landscape presents several issues around the cost of trading , forcing participants and venues to set up dual operations , all of which are additive costs that eventually trickle down into the market . Code bases for algorithms become more complicated and complexity is added
32 // TheTRADE // Winter 2021