The TRADE predictions series 2022: regulatory divergence in the UK and Europe post-Brexit

Following Brussel’s recent changes to MiFID II in November and with the results of the UK’s Wholesale Markets Review due to come into play early next year, these participants expect regulatory divergence to take centre stage in 2022.

By Editors

Continued divergence in regulation between Europe and the UK may see London wrestle back some of that European share trading business from Amsterdam and Paris during 2022. With a significant amount of business executed in European names done on behalf of international investors, further curbs on dark trading and on business consumed by Systematic internalisers (SIs) may lead to an increase in the cost of getting business done in Europe next year, particularly for larger sized institutional business that today looks to those alternatives to mitigate the impact of trading on lit order books.

With the UK seemingly abandoning the share trading obligation (STO) and the double volume cap (DVC) regime, allowing for systematic internalisers (SI) and frequent batched auctions (FBAs) to trade at fair value at the mid-price and in the short term at least – applying lower Large-in-Scale thresholds for European shares – from a best execution perspective London may become a more attractive and cost effective destination when trading European shares on behalf of institutional investors. Quite how that plays out for Europeans unable to access that liquidity under the European STO and or whether the European regulator might react to any shift in liquidity back to London remains to be seen. 

– James Baugh, head of European market structure, Cowen Execution Services

Next year will see UK and European regulators seeking ways to boost or maintain the relative attractiveness of their capital markets – each keeping a careful eye on the other. While we’re pleased to see the EU moving forward with plans for a consolidated tape (CT), to realise its aim of creating a bigger, more vibrant and interconnected European marketplace, it should include pre-trade data from the outset and reward all data contributors fairly.

We believe 2022 will be a tipping point in levels of investor and broker frustration with those market operators that continuously oppose progress towards an integrated and competitive European marketplace – whether via opposition to the CT, to clearing choice, or to market mechanisms designed to benefit end investors. One hopes this will encourage market participants to increase their support of pan-European operators that bring innovation, choice, lower costs and better execution outcomes. Similarly, innovative trading mechanisms designed to enhance institutional trading outcomes, such as conditional block venues and periodic auctions, will also continue to evolve and grow. As more firms integrate market data feeds from periodic auctions into their workflows, for example, these mechanisms will support a wider range of trading strategies to the benefit of end investors.

– Natan Tiefenbrun, head of equities, Cboe Europe

2021 provided lots for the industry to digest, with both the European Commission MiFID II review and HMT Wholesale Markets Review taking centre stage for many within Execution Services. There has already been evidence of the evolving regulatory regimes bringing about change to how order routing methodologies are being deployed and it looks as though this is set to continue into 2022. Already there has been increased activity in EEA securities executing within UK regulated venues (where share trading obligations allow) and with the differing regulatory approach to Dark trading caps between UK and EU this could lead to further shifts in liquidity. We have seen continued growth and strength in both the listing activity of the ETF market in London as well as further moves towards on-exchange trading as this looks set to grow again next year as execution channels allowing for strategic access to liquidity on venue become more mainstream. Block trading and access to outsized liquidity will continue to be a major theme in 2022 as data and access to real-time Block liquidity information direct to end customers will become more prevalent. Automation and differentiating through unique access to new liquidity, especially in what might become an even more fragmented equity and equity-like landscape will be top of agenda in 2022.”

Scott Bradley, head of securities trading sales and head of platform distribution, capital markets, LSEG

When the UK left the European Union an hour (GMT) before the clocks chimed in 2021, many of the implications for financial markets had been predicted and prepared for. However, there were unintended consequences and we continue to see the market adapting. Next year we will no doubt see further political and economic knock-on effects, some anticipated and others less so, as the market continues to evolve.  Recent regulatory guidance in Europe is highlighting the different paths being taken by the UK and continental European equities markets. Since Brexit we have seen increasing polarisation as liquidity shifts across venues and mechanisms.

The debate around the consolidated tape appears to be leading to action at last, and the tender process and development of an equitable commercial model will attract much interest. This will take time to implement; the community may face many challenges around trading transparency until the approach is agreed and delivered. Beyond Europe, fragmentation is increasingly occurring in international markets as disruptive alternative venues take on the incumbent national exchanges. This is driven by technology, and of course data, and requires the right solutions to help navigate the complexities. The past 18 months have demonstrated how remote access to smarter independent insights can empower data scientists and decision makers. This trend is likely to accelerate during 2022.

– Robin Mess, CEO and co-founder of big xyt