UK’s STO divergence could exclude Europe from liquidity, Liquidnet report warns 

With three quarters of trading taking place between the UK and international institutional counterparties, European asset managers could be left at a disadvantage.

European asset managers could be excluded from significant pools of liquidity following the UK’s decision to axe the share trading obligation (STO) following Brexit, a Liquidnet report has warned.

The liquidity landscape report found that between April and September 2019 75% of trading occurred between the UK and international institutional counterparties, with only 25% including EU asset managers.

The UK moved to scrap the STO and double volume caps (DVCs) relating to dark pool trading in April as part of its regulatory divergence away from Europe following Brexit.

Liquidnet claimed with such a large portion of trading historically excluding Europe and with UK asset managers now able to trade wherever they see fit with their US and Swiss counterparties, asset managers in Europe could be left at a disadvantage.

With the upcoming consultation paper due to be published by ESMA in July, it is likely that Europe will review its rules on the STO and DVCs.

The decision to remove the STO and DVCs came as part of a series of regulatory divergent moves by the UK as it looks to navigate the markets outside of the European Union.

In April, the UK’s Financial Conduct Authority (FCA) alongside the HM Treasury also set out plans to consult on the removal of certain research rules and best execution reporting requirements under MiFID II regulation.

Research from SMEs with a market cap below £200 million and fixed income, currencies and commodities research will be exempt from MiFID II unbundling requirements under the terms of the UK’s proposal.

The consultation builds on the COVID-19 relief package offered by the European Commission in March, as the two entities continue to attempt to foster interest in their markets following Brexit.