Stocks caught in crossfire of no-deal Brexit share trading plans

Analysis from big xyt shows that some stocks will be caught in the crossfire of a UK share trading obligation, as industry’s concern on EU no-deal Brexit share trading plans heightens.

More than a dozen securities could be caught in a political crossfire if the UK applies a similar share trading obligation to the EU’s under a ‘no-deal’ Brexit, according to analysis by data specialist big xyt.

The analysis shows a list of 18 stocks, including major securities such as Vodafone, BP, Rio Tinto, and GlaxoSmithKline, that would be heavily impacted if UK authorities took a parallel approach to the EU’s share trading agreement, risking a tit-for-tat scenario at the expense of the end investor.

Of the stocks analysed, 18 met the European Securities and Markets Authority’s (ESMA) liquidity requirements, and trade on both the London Stock Exchange (LSE) and another EU primary venue. According to big xyt, there is a significant overlap between the UK stocks identified by ESMA as being liquid on EU27 venues, and the EU stocks that UK authorities would also classify as liquid on a UK trading venue.

“What we are showing is the tug-of-war on both sides,” said Mark Montgomery, head of strategy and business development at big xyt. “The issue for the investor is determining which of these stocks they will have to make a decision on, and where they will find the liquidity going forward. For many of these 18 stocks, there is almost no institutional sized liquidity in EU27 venues. The bigger picture here is whether this means that Europe will trade less frequently in London stocks and vice-versa.”

Last month, ESMA stated that in the event of a no-deal Brexit, and in the absence of an equivalence decision handed to the UK by the EU, the share trading obligation will apply to all shares traded on EU trading venues, and UK shares that are considered liquid in the EU.

The move has sparked major concern for market participants who could be forced to trade on less liquid venues, prompting the UK’s Financial Conduct Authority (FCA) to warn ESMA of the potential overlap between the EU share trading obligation and future UK obligations.  

“This has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution. We therefore urge further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets,” the FCA said.

Similarly, the Association for Financial Markets in Europe (AFME) wrote to the European Commission following ESMA’s statement on the share trading obligation, urging the authority to consider that it will also have a negative impact on European investors. AFME warned that a UK share trading agreement could result in significant withdrawal of liquidity from EU venues flowing from UK investors, banks and brokers.

“European investors will suffer from an increasingly fragmented trading landscape, incur significantly higher costs of execution and be forced to deal with an inability to access optimal prices and volumes,” AFME said.

Furthermore, AFME cautioned that for index tracker funds whose trading activity requires access to the primary market opening or closing auctions, costs of trading will surge without access to the auctions if their funds include one of the 14 stocks that ESMA has deemed liquid in the EU.

With a no-deal Brexit still a potential outcome, and no agreement on UK equivalence currently in place, the long-term effects of the potential tug-of-war between UK and EU regulators could see major disruption to the trading community should the UK apply its own share trading agreement.

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