Regulatory Relations

In July 2019, the Swiss stock exchange and its operator SIX were stunned by the EU decision to deny Switzerland and its stock exchange equivalency status. As a result, Swiss stocks could no longer be traded on European multilateral trading facilities (MTFs). But this did enable some valuable insights. By Jennifer Hlad, head of equity sales, UK & Ireland, at SIX.

Combined with the impacts of the pandemic, the EU decision set Switzerland up for a year full of unpredictability and unprecedented stress-tests. SIX’s market share rise to over 99% in 2020, while trading volumes spiked to new levels and highly volatile stock price movements tested the resilience of the exchange’s infrastructure. 

However, 2021 has seen an end to the 19-month deadlock where Swiss shares could only be traded on their home market. Despite the uncertainty from the pandemic, the Swiss ecosystem ensured fair and orderly trading at all times, while managing to keep spreads tighter and recover more quickly than many European markets.

There have been many lessons learned since the non-equivalence, and with the impacts of Brexit, the US elections, the pandemic and the Covid-19 vaccine, the past year might have been the most unpredictable for exchanges in years. However, it allowed the Swiss stock exchange to gather some unique insights regarding the impact of liquidity fragmentation and consolidation, in addition to all factors that influenced trading in 2020.

Finding a balance

When the Markets in Financial Instruments Directive (MiFID) came into force in 2007, competition rose and, subsequently, liquidity was fragmented across several trading venues. Therefore, it came as no surprise when, following the EU declaring the Swiss Financial Center as non-equivalent, some trading venue providers were concerned. The consensus was that overall trading volumes would decline, as spreads were predicted to widen and trading costs were predicted to rise. However, in reality, spreads on the exchange were largely unaffected, and the depth of liquidity actually improved due to pooling liquidity into one place rather than fragmenting it over several trading venues.

With Brexit coming into force in December 2020, the UK was free to make agreements on its own and consequently, Swiss and UK stock exchanges were granted equivalence, effective from February 2021. This transition was happily welcomed as it opened up additional opportunities to source liquidity, as well as reigniting competition for trading in Swiss shares; a positive shift that continues to push the exchange forward, demonstrating its leading innovation. However, in addition to these positive developments on the market, we have also seen a decreased probability of order execution. These accounts have indicated a need for an open debate on market structure, which should involve the perspective of all market participants, including the buy side, mid-tier and smaller market participants, to avoid reaching a tipping point where complexity of fragmentation outweighs the benefits of competition.

As the developments are ongoing, there is no doubt that equivalence has brought back the fragmentation in Swiss shares. However, the coming months will be a test to show where the new balance will be established between trading on the reference market and on the alternative platforms.

Moving forward 

As markets began to stabilise after the first shock of the pandemic in 2020, the industry recovered at a fast rate, with the resumption of trading flows moving quickly within the first few months. This is largely due to investors having a better understanding of the risks and opportunities associated with such change.

However, today, the industry is welcoming in a new investor class that represents a younger segment of the population. This new class is eager to get involved and it is our role as an exchange to continue supporting their advanced progression. We will need to teach these new investors how to benefit from the current market post-Brexit, as there are a plethora of platforms and resources available to them. Many of these resources are easy to access and seem ‘cheap’, but we need to ensure they fully understand the dynamics and benefits behind them – and which benefits trading on a regulated exchange encompasses.

Previously, to successfully manage times of such uncertainty, different approaches were taken and many exchanges upgraded their platforms and systems to bring about unprecedented change. Initiatives such as our ‘Trading At Last’ platform were introduced; a new trading session for Swiss-listed equities, which saw days where nearly 100% of the daily trading activity was traded. We can expect to see further initiatives created to manage the market post-Brexit, and these new investors will need to keep their finger on the pulse to achieve the best outcome.

Return to normality

Even though the return to normality promises to be challenging, we are looking forward to the opportunity to demonstrate our innovative potential and our Swiss pioneering spirit anew. Right now, I believe that Switzerland is in an optimum position due to the Swiss-UK equivalence agreement, and we are working on a ‘wish list’ for the best results. There are still things that need to be addressed, which were not in place when the UK was part of the EU, but that has created an opportunity to improve our current situation and streamline processes. This is an exciting time, and these opportunities will pave the way for us all to get involved and shape the future.

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