MY PROFILE LOG OUT FEED THE FORUM ADVERTISE SEND AN INVITATION EQUITIES DERIVATIVES FICC FINTECH/CRYPTO REGULATORY LIQUIDITYMATRIX SPOTLIGHT SERIES VIDEOS PHOTO GALLERIES EVENTS July 07, 2019 Swexit: The Impact on Equity Trading One Week On Tim Cave TABB Group Follow | Profile | More Share On July 1st, European traders scrambled to quickly move their trading in Swiss shares from London and EU venues to Swiss venues after a stalemate between the European Commission and Switzerland over granting "equivalence" to Swiss venues. TABB Group Analyst Tim Cave examines the impact of Swexit on trading activity after the first week, and discusses what are the implications for European equity market structure. Looking ahead, Cave offers a preview of what could happen to Britain in the event of a no-deal Brexit scenario in October. On June 30th, the so-called ‘equivalence’ assessment granted by the European Commission to Switzerland’s stock markets expired. This was a temporary assessment, first granted in December 2017, and was tied to negotiations on the wider relationship between Switzerland and the EU. The assessment was critical because, under MiFID II, EU firms must trade shares on EU venues or equivalent third country venues (unless those shares are not available for trading in the EU). In short, without equivalence, EU firms would be prevented from trading Swiss shares on the primary Swiss exchange and forced to use EU venues instead. For context, around 30% of Swiss turnover had been taking place on EU-based venues. In a retaliatory move, the Swiss issued an Ordinance which, in the event of no equivalence, prevented Swiss stocks from being traded on foreign venues (excluding OTC activity such as SIs). As the June 30th equivalence deadline expired, Switzerland enacted the Ordinance and around 300 stocks were de-listed from EU venues including Cboe Europe, Aquis Exchange, Turquoise, Liquidnet, ITG Posit and UBS MTF. This was a significant moment for European equity market structure in many ways: Switzerland is the fourth-largest European market by value-traded and, with around 30% of that trading taking place in the EU, the de-listing had a significant impact on trading behaviour; it was the first major example of regional fragmentation since MiFID I’s attempt to promote pan-European trading in 2007; and finally, it offered a preview of what could happen in the event of a no-deal Brexit scenario in October. Many firms were scrambling at the end of June to ensure continued access to liquidity in Swiss stocks, and fully understand the legal implications in some ‘edge cases’ (i.e. stocks with dual listings in the EU and Switzerland). All EU trading firms would have to find ways to trade directly on the Swiss exchange, or via brokers with access. The Swiss exchange had launched a fast-track membership programme for new members last year, in anticipation of non-equivalence. While most large brokers already have Swiss exchange memberships, not everyone was a user of its dark pool, SwissAtMid. The impact on Swiss volumes since July 1st has been a source of much anticipation but, in the first week at least, the level of disruption seems to have been minimal. Swiss market volumes in the first week of July were slightly down versus June, but that was broadly in line with overall volumes in the EU market (see Exhibit 1). Exhibit 1 – Swiss versus EU Equity Trading Volumes Source: big xyt and TABB Group As expected, trading activity in Swiss stocks shifted from EU-based venues to the Swiss primary market and its dark book, SwissAtMid (see Exhibit 2). A quirk of the Swiss market is that its financial market rules, called FinFrag for short, do not include caps on dark pools so SwissAtMid can operate without restrictions. However, the withdrawal of the pan-European MTFs has meant there are no periodic auctions, or specialist block venues, operating for Swiss stocks. Arguably the lack of dark pool caps in Switzerland makes periodic auctions redundant but it is less choice for investors nonetheless. Exhibit 2 – Swiss Equity Trading by Venue Type (On-Exchange Only) Source: big xyt and TABB Group Overall average trade sizes increased on both lit and dark books (see Exhibit 3), to values typical of the Swiss exchange. Some brokers did report that spreads increased, from historical levels of around 3bps to 3.4bps, but that may have been driven by the different tick size regime in place in the Swiss markets compared to the EU. Exhibit 3 – Lit versus Dark Average Trade Size in Swiss Stocks Source: big xyt and TABB Group Exhibit 4 shows the breakdown of liquidity in Swiss stocks by trading mechanism, including OTC activity. Lit trading volumes increased significantly, as did volumes in SIs, but off-book and auction volumes dropped. To reiterate, the Swiss Ordinance does not apply to OTC trading, so systematic internalisers operating in the EU can still trade Swiss stocks. Early anecdotal evidence from the major SIs run by electronic liquidity providers indicates no significant change in their relative turnover of Swiss activity. It will be interesting to follow the reaction of these SIs, and other market makers, to the changes in the Swiss market structure. The withdrawal of so many venues from the Swiss market may limit the ability of SIs and other market-makers to unwind positions and so their volumes may well fall over time. The changes may favour the internalisation activities of major banks in the longer run, with their greater ability to warehouse stock. At least one bulge bracket indicted they had sent slightly higher volumes to their own SI last week. Exhibit 4 – Swiss Equity Trading by Venue Type (including OTC) Source: big xyt and TABB Group While it remains early days and the impact of these changes will play out over a longer period of time, it is already obvious European equity markets have taken a backward step. Yes, the market adjusted to ensure a smooth transition on July 1st, but Switzerland no longer benefits from the greater competition and pan-European venues that emerged from MiFID I. Less choice and less competition could drive up trading costs over time in Switzerland. The situation is being closely watched in the UK because, under a no-deal Brexit scenario, the UK will be relying on equivalence to maintain access to the EU and vice versa. The Swiss believed that all the necessary conditions were met for recognition by the EU but the expiration showed the determination of the EU to cut off access. Even though the UK is aligned with the EU having implemented MiFID II at its outset – the situation in Switzerland shows securing stock market equivalence will be a challenging process and the result of wider negotiations. Equivalence is entirely at the behest of the European Commission, and even if its granted can be withdrawn at any time. The issue is more complex in the UK because of the number of dual listed UK/EU stocks, and because for many of these stocks the main centre of liquidity is in the UK. The EU has already indicated it intends to force EU firms to trade EU stocks in the EU in the event of a hard Brexit. The UK has yet to state its position on the matter and will no doubt be closely monitoring the situation in Switzerland.
I find that this is one really professional analysis. Thank you for sharing it on this forum. However, I dont think that these disagreements between EU and Swiss will have some significant impact on market. It would be rather only short term effect