Where will the liquidity shift within Europe?

Recently, Phil from the FT highlighted the risk for about 90 dual-listed companies under a no-deal Brexit. But I think the problem is much bigger. In our own analysis, we took it further and found about 230 liquid stocks (not necessarily dual listed) that had roughly a 50:50 split of turnover across UK and EU27. While dual listing complicates compliance, it also causes a problem if half of your turnover is on the wrong side of the Channel.

At the heart of the problem is the little known MiFID II trading obligation which is currently flexing its extraterritorial muscle. The rule requires EU firms to trade all equities on an EU recognised trading venue. Under a no Brexit deal the EU is planning to treat UK venues as non-equivalent, and in fact, has also threatened Switzerland with removing their equivalence too.

Switzerland attempts to neutralize the problem by banning EU27 venues from trading Swiss shares. Will this work? Switzerland’s approach will probably be successful in securing access to SIX for EU investors. However, it inevitably gets more complex than that. First, EU Systematic Internalisers may step up to offer trading in Swiss stocks and second, the ultimate type of Brexit we endure, will determine whether Swiss stocks actually are traded in London.

With all this political upheaval, the chances for a major liquidity shift must be high. The trick will be in working out the winners and losers.