The liquidity landscape post-Brexit

European trading venues were the main beneficiaries after the UK officially left the European Union on 31 December 2020, according to Liquidnet’s new Liquidity Landscape report – First Week Post-Brexit.

European venues saw their share of EU Share Trading Obligation (STO) stocks jump from 51.78% pre-Brexit to 77.46% post-Brexit, while UK market share in EU trading slid from 25.24% to 3.58% when looking at addressable liquidity only.

Initial data also showed lit primary exchange represented 49% of market share, lit MTFs, 15%, dark MTFs, 15% and periodic auctions, 2.8%.

Meanwhile, addressable systematic internaliser (SI) activity in EU STO stocks fell to 18.8% from 22.8% pre-Brexit.

However, there is some confusion as to  trades reported under one unique MIC “SINT”  which is a four-letter market identifier code in post-trade transparency indicating an SI transaction.

The report noted that it is impossible to determine the firm in question or the location of the SI, whether the trade is from an EU or UK SI.

It said although the industry is trying to improve transparency, understanding the routing logic behind the SI activity as well as how the SI determines addressable and non-addressable liquidity remains a challenge.

There are also issues over dark trading. The report warns that with London aiming to champion alternative pools of liquidity to attract non-EU activity, there remains a risk in dark liquidity re-gravitating back to London.

The issue of equivalence still hangs in the air but in the meantime the UK and the European Commission aim to thrash out a memorandum of understanding (MoU) by March on regulatory co-operation.

The report also highlights that the UK is widely anticipated to grant Switzerland equivalence in the near future.

“With UK and US firms able to execute on UK and Swissvenues under lower large in scale (LIS) thresholds, European concerns they could be placed at a disadvantage are likely reinforced,” it said.

This could lead to a renewed appetite for the EU to grant equivalence but as this is decided unilaterally by the EU and can be withdrawn on short notice, this is unlikely to support business in the long-term.

Rather than market-wide equivalence, the report said Europe is expected to grant equivalence in areas that best serve their interest as they have already done with time-limited equivalence for UK central securities depositories until 30 June 2021 and UK central counterparties for derivatives clearing until 30 June 2022.

As the report points out, the area to watch will be how European regulators view the continued level of dark trading and management of SI cross entity risk. “Given the Financial Conduct Authority’s (FCA) response to make dark trading more attractive, either Europe will look at restricting cross-entity risk or delegation, in particular the ability for firms to use reverse solicitation,” it added.