By Sylvain Thieullent, CEO, Horizon Software.
The abrupt finalisation of the Brexit agreement meant UK-based firms suddenly had to trade stocks in the EU, and vice versa. Almost overnight, firms had to move all operations to the EU or they simply couldn’t trade.
It’s not easy to move operations from one country to another, let alone in the middle of a pandemic. Through no fault of their own, firms have been running around like headless chickens trying to work out what to do. There is still talk of an equivalence deal, but progress seems slow and Europe is bound to increase trading activity, with Amsterdam being the main beneficiary so far.
As the dust begins to settle, the long-term implications are beginning to take shape and we can expect to see a wave of M&A activity in Europe as firms recognise the changing global expectations for trading services.
International trading ecosystems
Brexit has completely changed the dynamics of international trading and the recent split has added to an already-strong international competition for trading activity. The danger is that while the EU and UK are preoccupied with Brexit, other regions are fostering innovation and creating more attractive trading environments.
On the other side of the Atlantic, for example, the market is embracing new, attractive investment vehicles, such as SPACs, which turn private equity into listed products. Although SPACs should be monitored closely by regulators, they cater to a clear business demand and could become a game-changing investment vehicle. Preoccupied with Brexit, Europe finds itself behind on this development.
At the same time, the capital markets in Asia are fostering their own trading ecosystem. International firms are being drawn in by both booming economies and the increasingly sophisticated nature of the financial markets, which again will draw trading activity.
Now that the split is official, the EU and UK must turn their attention to this global shift. While an equivalence deal would have been preferable, the absence of a comprehensive agreement has opened possibilities for both sides. Each market can think more pragmatically about its future and what it can do to support trading ecosystems.
The UK is already talking about moving away from the double volume caps that place limits on the volume of trading each year in the EU, pushing trading volume away from public exchanges. It’s an example of how each market might improve their trading ecosystems.
Having two autonomous regulators competing with one another will encourage each to examine the other’s initiatives and improve on them. Each regulator should find out what their market would benefit from and implement initiatives that add value. This may also serve to kick the EU into gear on financial services, which is very slow to move forward and has relied on London.
The consolidation of European trading
Beyond regulatory frameworks, European firms will have fresh motive to upgrade their services.
The tale of Brexit so far has been on of fragmentation, with the EU and UK untangling their intertwined financial infrastructures. This presents operational challenges, but it forces firms to review existing structures and the shakeup to traditional market structures sparks change that will address legacy inefficiencies. As such, we’re likely to witness a wave of M&A activity across Europe as trading institutions wake up to the evolving demands of investors.
Many firms are restructuring their operations at the start of a period of significant consolidation in trading services. Most famously in Europe is the Refinitiv and London Stock Exchange deal, but this follows a broader trend whereby large top-tier firms are tying together services that will only grow in importance for the customer.
Looking at the agency business, the top tiers are transitioning from commission-based to service-based models. Increasingly, they offer zero commission on top of supplementary services that support trading, such as raw and sophisticated data, lending facilities, and trading tools. It provides a level of service that tier two firms are struggling to compete with.
This trend hasn’t quite hit Europe yet. Euronext is working on its deal with Borsa Italiana and the Deutsche Boerse has looked to diversify their trading, but neither have made much progress, particularly relating to data services.
On the other hand, the transition to a holistic offering was already well underway in London. So as activity, talent and ideas flow from London to the EU, European trading firms will examine what their clients want and will begin to upgrade their services in line with this global trend. And, for European firms, the mission to provide a bundle of complementary trading services will often require acquisition or, at the very least, significant collaboration.