Despite European policymakers’ worries over the UK’s dominance in trading in the post Brexit era, 74% of volumes in share trading obligation (STO) stocks are still being executed on European Economic Area (EEA) venues with only 2.63% on their UK counterparts, according to the latest Liquidnet Liquidity report.
The remaining 23% are off-exchange or via systematic internalisers.
As the report notes, “Strong concerns remain with European Union (EU) regulators over the potential lack of oversight of UK trading venues should they start to attract more international and European flow. This concern has not materialised in practice.”
Although the UK and EU signed a memorandum of understanding, the report believes that the prospect of this providing a meaningful framework for collaboration and convergence is “low.”
The report states, “the political climate on the future relationship between the two jurisdictions only adds to the state of flux regarding future liquidity formation and what firms will need to do to adjust.”
In fact, they have been moving in opposite directions with the EU looking to implement a range of proposals aimed at pushing more volumes onto lit markets while the UK has adopted a much more flexible approach.
Last April, the UK Treasury and Financial Conduct Authority (FCA) moved to scrap dark volume caps (DVCs) alongside the share trading obligation (STO), In its final version, the Wholesale Markets Review (WMR) is expected to have additional reforms.
Liquidnet’s report found that dark trading as a proportion of on-venue trading in the UK peaked at 15.6% in November last year, later dropping to 13.2% in December.
“The question is at what level does use of the RPW (reference price waiver) start negatively impacting price formation with the publication of stale quotes? Interestingly, the FCA is considering the use of non-UK prices for waivers,” according to the report.
Another issue highlighted in the report is the EU’s long held wish to wrest clearing back from London. Although the European Commission has extended equivalence of UK clearing houses until 2025 to avoid a cliff-edge effect in 2022, the report notes that the legislator is also looking to publish a consultation to make the EU more attractive to clearing and reduce the over-reliance on the UK infrastructure.
©Markets Media Europe 2022
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