Equity trading volumes move to European venues

Monday was the first chance for European equity traders to get a feel for how markets would function in the post Brexit environment.

Under new rules which mandate that European equities should be traded on venues within the European Union. Something that the City of London can no longer lay claim to.

The last-minute nature of the UK’s trade deal with Brussels did not involve a specific agreement for financial services and to some extent, UK firms have been left high and dry until a formal agreement can be reached.

Such an agreement may extend equivalence, to UK businesses, trading venues and regulations and that should ensure that UK firms can trade with and in Europe, as they did before the December 31st deadline. Negotiations between the two sides are due to begin this week in Brussels.

However, in the absence of a deal, a chunk of European equity volume appears to have decamped to the continent either back to their primary exchanges or to a host of MTFs based in Europe.

That change of venue hasn’t caught the markets napping however because the London based operators of the alternative trading systems had previously set up their own EU based trading venues.

The CBOE, for example, opened a trading hub in Amsterdam in parallel to its existing UK share trading operations. The London Stock Exchange’s Turquoise trading platform had made similar arrangements, as have other exchanges and market participants.

According to data from Refinitiv, around €6.0 billion worth of trading volume that would previously have been facilitated in London was executed on European venues yesterday instead. The new European MTFs experienced their busiest day ever as a result of that change.

It’s not clear whether that shift will be permanent, however, the EU has adopted a hard-line position over financial services by for example refusing to recognise the UK’s regulatory regime as being equivalent to its own and no longer recognising UK qualifications as being valid within the EU.

Moves that seem rather disingenuous given that much of the EU’s securities regulation was actually drafted by UK based lawyers and the fact that the UK has had a far more robust regulatory system than much of continent for many years.

The tactics seem designed to try annexe certain business areas away from the City of London and into Europe and share trading is one such.

Indeed, FinanceFeeds has explained in detail a number of times why London will always be the center for trade execution, and not mainland Europe.

Other factors include derivatives clearing and trade reporting.

However, there have also been other longer-term and ongoing shifts in the way that European equities are being traded. A recent report from big xyt, a data analytics business, shows that auctions are taking on increased importance in the European trading day.

The report finds that auctions are grabbing a growing proportion of European equity trading volumes and as of December 2020 they accounted for as much as 29% of daily turnover, up from 27% in Q4 2019. In 2016 that figure stood at just 20%.

Much of the growth in turnover has been driven by the rising popularity of closing auctions. Overall turnover or volume in European equities was up by 10% year over year in 2020 and looking at the first half of the year in isolation the analysis found a 23% increase in volumes traded, compared to the same period in 2019.

The 7 busiest trading days of 2020 were recorded between February 28th and March 20th. However August was one of the quietest months on record since MiFID2 was enacted.

In terms of execution venues, continuous lit markets achieved an average daily market share of 44.30% in 2020, whilst systematic internalisers, off-book crosses and lit auctions saw market shares of 16.50%,15.0% and 17.3% respectively, though those figures were not dissimilar to the 2019 totals.