The UK wants to change its rules around share trading to adapt to life after Brexit, in an effort to entice EU share deals back to the City of London.
EU share trading quickly fled the UK after the full terms of the country’s departure from the bloc kicked in at the start of this year, with cities like Amsterdam and Paris picking up the slack for the €8bn-a-day business. The EU did not recognise UK stock exchanges as having standards equivalent to its own, which meant its institutions were barred from using London-based venues.
To redress the balance, the UK Treasury has said it would like to boost off-exchange trading venues known as dark pools. Other proposals under consideration include easing the minimum pricing increments, known as tick sizes, on lightly regulated private venues run by banks and high-frequency traders, according to people involved in the discussions.
The government will launch a full consultation over the summer in a review of the UK’s wholesale financial markets. An announcement may come as early as the start of July in chancellor Rishi Sunak’s annual speech in the City of London, say people with knowledge of the plans.
London has portrayed its reforms as “ambitious”, while also ensuring its rule book is fair, competitive and of the highest regulatory standards.
“The question is what the UK does post-Brexit without equivalence,” said Rebecca Healey, founder of Redlap Consulting, a capital markets consultancy. “There’s a political desire to find a benefit and demonstrate that Brexit is a good thing for the market. But running two rules books is something people don’t want. You have to be careful what you tweak,” she said.
Changes to the vast pan-European Mifid II package of market regulations would be needed for the UK to achieve its goals here, potentially opening up another fissure between British and European authorities over financial services.
But the prospect is also dividing market participants in London between those wanting more freedom to trade where they want, and those worried diverging rules will raise operational and technology costs and further fragment the market.
Dark pool restrictions have become one of the touchstones for those arguing EU standards do not fit UK markets. The UK has long been at odds with the EU on the venues, which allow fund managers to buy and sell large blocks of shares without disturbing the price on the market. The UK has long regarded them as a benefit to investors.
The EU, worried about the growth in off-exchange trading, set caps in 2013 on the amount of business that could be executed in dark pools, both in individual stocks and on one venue.
In February more than 16 per cent of trades in UK blue-chip stocks were conducted in a dark pool, a record and the highest of all major indices in Europe according to data from Rosenblatt Securities.
Those figures may rise further after the final set of caps, last imposed when the UK was part of the single market, rolled off in early June and the regulator said they would not be extended.
The Treasury also wants to kill an EU rule called the “share trading obligation”, which determines where shares can be traded and was designed to stop banks from matching their customers’ deals on their internal trading desks, bypassing the exchange and saving on fees.
“The UK could create an environment that results in UK venues regaining market share in EU stocks,” said Anish Puaar, market structure analyst at Rosenblatt Securities in London.
“EU firms wouldn’t be able to trade on these venues, but UK, US, Asian firms could. If a significant amount of EU share trading moves back to the UK, it will then be interesting to see how the EU reacts.”
But alongside deleting unwanted EU rules lies the issue of what replaces them, if anything.
A 2017 paper by the FCA found dark trading began to damage liquidity on the UK market once it reached more than 15 per cent of the total value traded.
Data from BMLL, a UK group, has highlighted the difficult problem policymakers face. The amount of dark trading in blue-chip French and German stocks in the UK has risen from 29 per cent in January to half the monthly volume in June, it found.
The gains came after the FCA in March made it easier to trade EU shares in London, cutting the trade size threshold that qualifies for a UK dark pool to just €15,000. That compares to €650,000 in the EU.
But Elliot Banks, head of product development at BMLL, said the shift to dark pools was more likely because of wider spreads — the difference between the price quoted to purchase a share and the level to sell — on UK exchanges.
The findings underscore that in spite of the political rhetoric, brokers remain highly sensitive to cost and pricing across different markets. “The question will be whether it’s worth adjusting our order routing systems for the UK,” said one trader at a London investment bank.
“We must be careful not to win business back to the UK for the sake of it, but for what’s best for the UK market,” said Alasdair Haynes, chief executive of Aquis Exchange, the share trading venue.