Harmonisation across Europe key to shorter market hours proposal

Responses to the LSE’s consultation for shorter market hours in Europe highlight the need for all exchanges to make the move if benefits are to be fully realised.  

Respondents to the London Stock Exchange’s (LSE) consultation on shorter market hours have agreed that for the benefits to be realised there must be harmonisation across exchanges in Europe.

More than 140 responses were submitted to the LSE following its consultation on shorter market hours earlier this year, and the exchange’s summary of those revealed that the industry is largely in favour of the move.

The majority indicated a preference for reducing the trading day from 8am-4.30pm to 9am-4pm, although some advocated for both 9am-4.30pm and 9.30am-4.30pm. Only a minority of respondents argued that market hours should remain unchanged, according to the LSE.

“We have published the summary of feedback today which shows a significant majority of respondents agreed that a reduction of market hours could lead to improvements in diversity and wellbeing,” a spokesperson for the LSE said.

In terms of the benefits of reducing market hours, particularly in driving diversity and improving the wellbeing of market participants, most agreed these can only be realised effectively if all exchanges across Europe agree to the proposal, given the pan-European nature of many trading roles.

Others also warned of the potential for further dislocation, market complexity and fragmentation if one trading venues agrees to reduce trading hours independently, instead of taking a harmonised approach to the bid across Europe.

“There was also widespread consensus from respondents that any change to trading hours would ideally require a broadly aligned approach across European exchanges and other trading venues,” the LSE spokesperson added.

Commenting on the responses to the consultation, Ben Springett, head of European electronic and program trading at Jefferies, said that proactive engagement from two of the major European exchange groups on the bid to reduce trading hours, including LSE and Euronext, suggests the industry may now be in a position to drive an evolution in equity trading.

“The results of the LSE consultation align closely with anecdotal dialogue I have been having with large asset managers around the world and that has been discussed publicly at a number of industry forums over the last year,” he added. “Any move to change market hours absolutely needs to be done in a harmonised manner, not just to enable some of the intended effects to be captured, but also to ensure we do not increase complexity further in the European landscape.”

Pan-European exchange Euronext launched its own a consultation on the proposal to reduce market hours, and recently extended the deadline for respondents due to the impact of the coronavirus pandemic until 30 June. CEO of Euronext, Stéphane Boujnah, told reporters earlier this year that it remains unclear if the initiative is relevant to markets in continental Europe, and warned that a shorter trading day could harm liquidity.

Investment managers, banks and agency brokers that responded to the LSE rejected the view that longer trading hours benefit liquidity. Most respondents agreed shorter market hours would in fact improve liquidity in the order book, but would not result in increased trading volumes.

Markets in Europe are currently open for business for 8.5 hours a day, much longer compared to the US and Asia where markets are open for 6.5 and 6 hours respectively.

Comparing Europe’s trading hours with the US, the Association for Financial Markets in Europe and the Investment Association highlighted that US market has six times the turnover than Europe, despite the shorter market hours. US markets also generally have lower trading costs and greater stability in liquidity conditions throughout the trading day. Both trade groups also previously said they would support a 12-month pilot on all major European exchanges to test the impact of the changes to market hours.

Elsewhere, market participants were asked to consider intraday auction activity as part of the consultation at the LSE, with a majority agreeing that the auction has not attracted liquidity as envisaged, but shorter market hours could serve to improve intraday liquidity. As a result of  widespread support, LSE confirmed it will discontinue the midday auction.

“London Stock Exchange will consider the issue further and continue to actively engage with stakeholders and industry bodies on this important issue, including to understand whether the current period of remote working due to the coronavirus pandemic has had any impact on their views,” the LSE’s spokesperson concluded.