An opinion piece for
The CityUnited Project
By guest writer Catherine McBride, economist
There was probably some celebrating in Amsterdam this week as it was announced that ‘Amsterdam ousts London as Europe’s top share trading hub’ during January 2021. The subheading claimed that the UK’s departure from the EU prompted the shift in dealing locations. However, it was an EU regulation that EU shares traded in euros must be traded on an EU exchange or in countries granted “equivalence” by the European Commission, coupled with the fact that the EU has not granted the UK equivalence, which caused the move – rather than any inherent Dutch competitive advantage.
How Dutch is your uncle?
The three equity trading platforms in Amsterdam are: Turquoise, majority owned by the London Stock Exchange Group in partnership with 12 investment banks; CBOE Europe, owned by CBOE Global Markets (CBOE stands for Chicago Board Options Exchange); and Euronext, a quarter of which is owned by a group of five European financial service companies, predominantly French and Belgian. So these trading platforms may be sited in Amsterdam in order to comply with EU regulations, but they are not exactly Dutch.
The same is true for the reported move in Euro-denominated swaps trading in London which fell from almost 40% of the market last July to 10% last month, while trading on US platforms doubled to 20%. At the end of the article it mentions that the move in swaps trading was mainly due to changing behaviour among interdealer brokers, such as TP ICAP and Tradition. However TP ICAP is headquartered in London and Tradition is listed in Switzerland. Trading platforms, interdealer brokerages and investment banks are all multinational companies and can easily shift their transactions across borders as required.
Staying ahead in the trading game
Although EU equity trading is a small part of the total UK financial services industry, UK regulators, the Corporation of the City of London, and the Treasury cannot afford to be complacent. If anything, this shift shows how easy it is to move electronic trading from one country to another. And while today it is the tiny EU equity trading sector that has been forcibly moved to Amsterdam by the EU, tomorrow it might be a larger section of the market, and it might be moving because there are better regulations, lower taxes or some other real competitive reason for doing so.
The EU wants the UK to agree to mirror EU regulations indefinitely, even when those regulations don’t suit the UK’s massive financial markets and in some cases appear to have been specifically designed to hobble it. However, financial services are not static; whole industry sectors have developed in the last thirty years – hedge funds, OTC derivatives, fintech, carbon trading, etc. Investment or hedging strategies that are popular now won’t necessarily be next year, or even next month. The City of London has held its leading position for so long because it is innovative, adaptive and flexible. Or used to be before the EU strangled it with regulatory compromises.
The UK can now relish and profit from the diversity
So, not only should the UK not align its regulations with the EU, it should be actively jettisoning EU regulations that don’t suit it. The first EU regulation to go should be MiFID II’s Double Volume Caps that limit the amount of trade that can happen each year outside of the public exchanges. This rule has hurt UK trading more than any other EU country because the UK has a larger and more heavily traded listed capital market than any other EU country. The very idea that you could have a one-size-fits-all limit across 28 differently sized markets, with different attitudes to share trading and listed companies, was always a nonsense. But as the UK had assets under management worth over $12 trillion in 2019, it is time that the UK regulators made it easier for larger funds to trade in the UK without showing their hand to the market or massively increasing market volatility.
This also raises another issue. Off-market trading doesn’t just facilitate larger transactions, it is also popular because it is cheaper. Both the exchanges and the government should be looking at reducing the costs of doing business in London – exchange fees, Stamp Duty, the 8% Bank Surcharge, the Bank Levy and employment costs are areas for reform.
The Bank of England needs to become a nimble regulator to ensure that financial firms can bring new products to market in the City, while the City needs to rediscover its innovative spirit. Just as it invented the Eurodollar market in the 1970s, maybe now it is time to develop an offshore euroEuro market.
The EU’s proportion of world market capitalisation has halved this century
Or maybe we should bypass the EU entirely and move on to doing more business in fast developing global markets. According to the World Bank, the total market capitalisation of listed domestic companies measured in current US$ has more than doubled since 2000, from almost $31 trillion in 2000 to $68.7 trillion in 2018. But the EU’s proportion of world market capitalisation has fallen, from 18.7% in 2000 to only 8.4% in 2018. So, tying the UK financial markets to the EU’s regulation would be as big a mistake as imagining that there are no investment opportunities beyond the EU’s borders. Simply dropping the requirement that an initial Public offering (IPO) must have 25% of its free float in the EEA is one regulation that could open up the UK stock market to more listings from the developing world.
The UK shouldn’t be frightened of real competition. In other parts of the world there are competing financial service centres. Singapore, Hong Kong, Shanghai, Tokyo and Sydney are all in similar time zones and still survive having carved out their own areas of expertise. It is to be hoped that there will eventually be real competition in European financial markets, but at the moment the EU believes that it can win only by excluding the competition. This makes a mockery of EU claims about level playing fields and seems to breach WTO Most Favoured Nation rules as well.
Both are reasons, if any more were needed, why the UK cannot trust the EU to play fair. The UK therefore needs to learn from this, make itself as attractive to new business as possible, and move on to greener pastures.
By Catherine McBride, © The CityUnited Project 2021
Catherine McBride is an economist who worked in the equity and commodity derivative markets in London for 19 years. She has written two papers on reforming financial regulation for the IEA and many articles on financial services.