Amsterdam, London, deviancy and regulators

Published on 21 April 2021

The shift of equity trading from London to Amsterdam may be permanent – but it isn’t terminal. In our look at European equity trading Anish Puaar, market structure analyst, Europe at Rosenblatt Securities, outlines the real shift in equity trading is a reversal of European shares being traded in London, which had benefited from the MiFID’s 2007 ruling that allowed shares to be traded away from their home market.

As this European order flow moves back to the continent, questions are arising around future divergence of regulation, particularly with the European Commission’s plans to revise MiFID II later this year.

Dan Barnes: Welcome to Trader TV – your insights is trading for professional investors and I’m Dan Barnes. Joining me today is Anish Puaar,market structure analyst at Rosenblatt Securities. We’re going to be discussing whether Amsterdam has really stolen the march on London. Anish, welcome back to the show.

Anish Puaar: Hi again, Dan.

Dan Barnes: So today we’ll talk about Amsterdam and London in the equity markets and potentially the way they might deviate. Obviously, I love any headline with Amsterdam and deviation in the title. Can you tell us, first of all, has London actually suffered a terminal loss of equity trading?

Anish Puaar: So London’s lost its status as the home of pan-European share trading, but I don’t think it’s terminal and it may not be permanent. The issue itself goes back to the EU’s MiFID rules in 2007, which made it possible for startup venues to compete with national stock exchanges for secondary trading. This resulted in the launch of a lot of alternative platforms, which are also known as MTFs. The vast majority of those are basically set up in London and decided to be regulated by the FCA. So these platforms will grab about 20-30% of equity trading in various markets from the likes of the London Stock Exchange, Euronext, Deutsche Boerse, Swiss Exchange and all the rest of them.

So the latest version of MiFID in 2019 introduced a rule that required EU shares to be traded on EU platforms. So obviously when Brexit hit, because there’s no regulatory equivalent, these London MTFs can no longer offer trading in EU shares. As a result, the London MTFs set up parallel entities in the EU to be able to trade those EU shares while retaining the UK shares and more recently, Swiss shares in London. So all of this data you see is effectively just that. It’s nothing to do with the London Stock Exchange itself losing their share of listings. Rather, it’s just this kind of secondary activity that’s moved to Amsterdam. So in terms of the impact on the UK, in terms of jobs and tax revenues, for instance, it’s kind of minimal.

Dan Barnes: How do you see UK and European Union regulators potentially deviating from existing market rules?

Anish Puaar: So, so far, the UK Treasury and the FCA have largely mirrored EU rules and in particular, MiFID rules. We’re now on to discussions about regulatory equivalence that will allow UK firms to do business with EU firms. And in my opinion, the chances of that seem to be diminishing day by day.

Despite that, while the option of regulatory equivalence is still on the table. I don’t think you’ll see that much divergence between the EU and the UK. But one small area that’s worth pointing out is the UK has canceled the dark pool caps that were introduced in MiFID II that essentially set a limit on the share of dark pool trades that can occur on any one platform or on the marketwide basis. So the FCA thinks dark pools provide good results for end investors and so it decided not to apply the caps going forward. And that’s fairly significant, because the number of Quixey 100 and Quixey 250 stocks, that fell under these caps is actually higher than most other European indices. So it’s going to be interesting to see how the trading of those indices evolves relative to the major EU indices. The removal of those cuts is really just a minor tweak to UK market structure rules.

Speaker 3: And I think it’s fairly well documented that the UK is going to carry out a broader capital markets review that will probably include more market structure measures. I think that’s true in the summer

Dan Barnes: And what then will those dynamics mean for buy-side equity traders and brokers?

Anish Puaar: If you speak to buy-side traders, most of them will tell you that the politically driven migration of liquidity from London to Amsterdam hasn’t really affected their trading or routing strategies much. But that’s really a testament to the brokers and the venues that have set up these new entities and enabled routing into them in a way that’s fairly seamless and allows business to carry on as it was before the impacts of Brexit hit. So the industry has obviously been through this before. I think it was the summer of 2019 when Swiss stocks were banned from the MTFs. So it was a kind of an overnight shift of liquidity. And actually my fear is that politicians see how well the industry can cope with these things, and they can prompt them just to make further politically driven decisions that create a lot of work behind the scenes.

You’ve got to remember, these were kind of big bang migrations that happened from one day to the next. There was no smooth rollout or anything like that, and the industry handled that very well. But, you know, all the while, while the industry has to handle these kind of shifts, what they’re not doing is innovating and trying to grow business.

Dan Barnes: Yeah, absolutely. So that said, then, are there any meaningful changes in order-routing or trading strategies in the offing as a result of what we have seen over the last six months?

Anish Puaar: There could be a need to rethink certain strategies in the months and years ahead if the UK deviates significantly from Europe in terms of market structure rules. The UK could fx make it easier for banks to internalize flow or it could take an even lighter touch approach to dark trading, going further than canceling the caps. It could also impose less restrictions on things like periodic auctions. Those kinds of things, I think, will become clearer once you see the MiFID II review, which is expected in Q4 this year.

Now you could see it become actually easier to trade EU shares in London rather than in the EU. Now, of course, because of the MiFID II rules, EU firms won’t be able to trade EU shares in London. But London has a chance to attract traders from other parts of the world and then bring back some of that liquidity that’s gone to other places. All of that is theoretical. We’ve got to see what the UK decides to do this summer, and what the EU decides to do as part of the MiFID II review later this year.

Dan Barnes: That’s been great, Anish, thanks so much.

Anish Puaar: Thanks a lot, Dan.

Dan Barnes: I’d like to thank Anish for his insights today and, of course, you for watching. To catch up on our other episodes or to subscribe to our newsletter, go to TRADERTV:NET.