In Part II, we look beyond the crisis towards what we hope will be more normal times and explore some of the bigger themes and issues that will impact the market infrastructure world in the months ahead.
A Brexit-shaped elephant
The COVID-19 crisis has been so dramatic that, amazingly, noise around Brexit has almost been completely drowned out. However, there remains a post-Brexit regulatory elephant in the room in the shape of Britain’s (and specifically London Clearing House’s) continued place at the top of the lucrative euro-clearing tree. Back in December, the EU granted one more year’s grace for the €735tn derivatives market to continue be cleared in UK clearing houses in the event of a no-deal situation. How LCH will fit into the fragmented regulatory landscape beyond the point when Britain formally exits the bloc remains to be seen, and there will be many tough negotiations between now and then. Certainly, continental clearing houses will hope that more euro-denominated clearing activity can move across the Channel after Brexit, but there remains a strong desire to find a solution with European regulators, especially given the cross-border nature of derivatives trading and clearing.
Shorter trading hours
On a more operational basis, stock exchanges have started to look at the issue of shorter trading hours. The idea initially came from the lobby group the Association for Financial Markets in Europe (AFME) and the UK’s Investment Association and has already received support from BlackRock. Supporters of the proposal argue that a shorter trading day could help to improve staff diversity and the mental wellbeing of traders, as well as concentrate liquidity in the market. Opposing arguments include the unintended consequence of harming liquidity, as well as the negative impact that fragmented trading hours would have across continental Europe and internationally. The LSE and Euronext have begun soliciting views from their market participants and the industry will be closely watching the results of these consultations. The pandemic has delayed the LSE’s publication of responses until the end of Q2, as reported earlier in the week by the Evening Standard.
The end of the M&A boom?
Prior to the crisis, the two biggest themes in the world of stock exchanges – as perfectly illustrated by the LSE’s blockbuster £27bn deal for financial market data firm Refinitiv – were the financial data arms race and consolidation within the industry. For the LSE, the tie-up with Refinitiv is a realisation of CEO David Schwimmer’s belief that “data capabilities will define the success of financial market infrastructure business”, while other groups will no doubt continue to be on the lookout for targets within the market data space that can help them to diversify their top line away from the traditional revenue drivers of trading volumes and listings. Stock exchange groups have been an acquisitive bunch in recent years, and it will be interesting to observe whether the same level of M&A activity continues in a post-Covid global economy that may well be in recession.
One new player looking to make waves and increase competition in the exchange sector via the promise of lower fees is the Members Exchange (MEMX). However, as with so many initiatives, last week the group announced that it had pushed back its launch until Q3 as a result of the coronavirus. MEMX is looking to take on the New York Stock Exchange and Nasdaq with what they promise will be a less expensive model, fewer, less complex order types and a basic market data feed. The group certainly has an impressive list of backers including UBS, Morgan Stanley, Goldman Sachs and JPMorgan, and the industry will be closely watching their progress to see whether the new venture can succeed in an area for so long dominated by established giants.