Christian Voigt, senior regulatory adviser at Fidessa, and former vice president at Deutsche Boerse, has published a blog post warning that there may be up to 230 stocks listed in the UK and EU27 at risk of Brexit because of a Mifid II trading rule.
The number has been uncovered using the Fidessa Fragulator, a free-to-use online tool, which enables analysis of more than two billion trade records from 50 market feeds to obtain an overview of trading patterns of European stocks and indices over time. The tool enables buy and sell sides to make decisions on which trading venues to use. Data shows not only the ratio of stock traded on so-called lit venues, but also dark pools, through Systematic Internalisers and bilateral OTC trades, giving access to a breakdown of the share volume, number of trades, average trade sizes, market share and volume weighted average prices across trading venues.
On 7 February, Voigt said Fidessa analysis found 230 liquid stocks with a roughly 50/50 split of turnover across the UK and EU27.
"At the heart of the problem is the little known Mifid II trading obligation which is currently flexing its extraterritorial muscle. The rule requires EU firms to trade all equities on an EU recognised trading venue. Under a no deal Brexit the EU is planning to treat UK venues as non-equivalent, and in fact, has also threatened Switzerland with removing their equivalence too."
"Switzerland attempts to neutralise the problem by banning EU27 venues from trading Swiss shares. Will this work? Switzerland's approach will probably be successful in securing access to SIX for EU investors. However, it inevitably gets more complex than that. First, EU Systematic Internalisers may step up to offer trading in Swiss stocks and second, the ultimate type of Brexit we endure will determine whether Swiss stocks actually are traded in London."
"With all this political upheaval, the chances for a major liquidity shift must be high. The trick will be in working out the winners and losers."
The issue was first highlighted by Voigt in April 2018, when he noted that: "Stocks traded in a single jurisdiction will likely continue to be traded locally, but it is anyone's guess what will happen to those instruments that are traded in the UK and the EU27 in roughly equal amounts."
"Looking at the turnover for a large sample of EU stocks in the Fidessa Fragulator (removing Swiss, British and generally illiquid stocks), roughly 230 different shares (representing about €2trn in turnover in 2017) fall into that category. It will be interesting to track what happens to those instruments if trading across the Channel becomes more challenging post-Brexit."