A new report from ESMA suggests that the UK’s withdrawal from the European Union in January 2020 resulted in a substantial decrease in trading volumes across EU capital markets – a trend that could be fuelling growth in closing auctions.
In 2021, following the UK’s official departure, EEA trading more than halved to just €13.5 trillion – down from €25 trillion the previous year (when the UK was still included).
This dramatic decrease in volumes was accompanied by four main changes within the EEA market structure: a decrease in the number of infrastructures trading shares, even though they remain elevated; a new distribution of trading, both by market type and by country; the relocation of domestic trading; and the increased specialisation of venues. However, the concentration of trading on a few venues remains high.
The findings are summarised in a report from the European Securities and Markets Authority (ESMA), entitled ‘Evolution of EEA share market structure since MiFID II’. Utilising regulatory data, the report outlines the development of the European share market microstructure between 2019 and 2022, with a specific focus on the impact of the UK’s withdrawal from the EU.
The UK’s “pivotal role” in European securities trading meant its withdrawal from the EU brought a significant drop in overall trading in 2021, found ESMA. Trading volumes on UK trading venues (TVs) in 2019 and 2020 accounted respectively for 50% and 69% of share volumes traded on exchange across the EEA and the UK. Conversely, UK shares were rarely traded on EEA TVs, with 11% of UK share volumes traded on EEA TVs on average in 2019/20.
Since all EEA shares are within the scope of the share trading obligation (STO) – introduced in the MiFIR framework in order to increase market transparency by shifting OTC share trading onto lit trading platforms – this meant that all EEA shares had to be traded on EEA or equivalent third-country venues.
Confirming the transfer of volumes in a few countries, share trading remains highly concentrated on a few trading venues after the UK’s withdrawal. The COVID-19 pandemic was also found to have an impact on the EU’s capital markets, as well as mergers among key exchanges, an evolution in their business models, and the ongoing participation of retail traders.
Tony Shaw, executive director, London office and head of sales, UK and Ireland at SIX Swiss Exchange, told BEST EXECUTION that the “fragile” European liquidity landscape has seen a growing trend towards the use of closing auctions since Brexit.
“These are seen as an increasingly important mechanism for enhancing price discovery and offering market participants efficient execution opportunities. Closing auctions help determine the official closing price of a security, which is critical for various purposes, including portfolio valuations, benchmark tracking, not to mention fund performance evaluations,” Shaw added.
“The final auction price also may be more favourable than the current market quote, which benefits both buyers and sellers. Traders in closing auctions have a high degree of execution certainty. Orders submitted during the auction period are typically executed at the determined auction price, providing clarity to market participants.”
ESMA said identifying and understanding the evolution of the European market infrastructure during the recent “transformative years” is key to levelling the playing field between execution venues.
“On the one hand, competition among venues can lead to more innovative services and lower fees. On the other a fragmented trading landscape may also impact market liquidity,” the regulator added.
© Markets Media Europe 2023
