Polarisation, not extinction - the future exchanges

With thoughts switching from MiFID compliance to the post MiFID impact on markets, here is a brief summary of some research on the probable impact on smaller European equity markets.

The traditional view is that with MiFID small national exchanges will cease to exist as they will be wiped out by the major exchanges/MTFs that MiFID facilitates. However, from our research we believe this over simplistic view overlooks the liquidity and size of some of the equity issues that these exchanges currently handle, as well as some of the services they provide. A more realistic scenario is for polarisation, rather than extinction. To explain what we mean by polarisation in this context, it is where the most liquid stocks graduate to the European “super-league” as they are viable to be quoted and traded on the pan-european exchanges. It is likely, but not necessary, that the “super-league” equities will migrate their listings to one of the larger major exchanges. The slower a country is to fully adopt MiFID principles, the more the pressure will be for these “super-league” stocks to migrate.

The non-super league members will remain on the local exchange, which will become a second market – e.g. as AIM in the UK – for the equity for smaller, start up or less liquid firms, but still supplying listing and primary market functions. Whether or not these local markets will consolidate cross border will depend on the importance of providing these services locally – e.g. language, culture, specific economic conditions. The changes may be gradual, but you should avoid being caught at the wrong end of a polarising market.

NB A version of this blog appeared in my monthly Financial Sector bulletin. To receive a copy each month send an email containing the word SUBSCRIBE in the title to contact at mpi-europe.com.