Regulatory Divergence and Dark Trading: Eyes Wide Shut?

Brexit has induced significant shifts in the European trading landscape. Which observations do you make from a Swiss stock exchange perspective?

André Buck: The European Union’s political stand-off with Switzerland which forced the repatriation of all trading in Swiss securities in mid-2019 as well as the return of competition – following an equivalency agreement between the UK and Switzerland – earlier in 2021 have been managed smoothly by the Swiss stock exchange and all market participants.

On the one hand, we can consider it a “return to normal” – fact is the EU still hasn’t granted the Swiss stock exchange equivalence, which his why the Federal Council has announced in November 2021 to extend the existing protective measure and to initiate the consultation on incorporating it into the Financial Market Infrastructure Act (FinMIA).

It sounds like there is a “but” as well. What are the downsides?

Yes, there is a “but” because on the other hand, regulatory divergence has undoubtedly increased. We have asked our registered traders how they assess the divergence in regulation between the EU and UK. Two out of five respondents said it’ll be challenging but manageable; a third stated it will create more costs and confusion among investors. Only 8% believe that regulatory divergence won’t have any impact, neither positive or negative – clearly a minority opinion. 

In which areas are traders expecting a regulatory divergence?

According to the results of our Trader Survey, the most impacted area is dark trading, which 38% of respondents put on top of their list. It was followed by the prospectus guidelines with 18%, the removal of double volume caps (DVC) with 14%, tick sizes with 12%, and the removal of the share traded obligation (STO) and the reduction of the Large in Scale threshold (LIS), both with 9%.

Percentage-wise, these aren’t huge differences – but that’s because they balance out across many different areas. This shows the scope of the challenge the industry is facing: it’s not just the one thing. 

Could you elaborate with an example which challenges trading participants encounter by being active on several markets?

Let’s take large-in-scales: the UK had lowered the thresholds around pre-trade transparency for large-in-scale waivers – while the European Securities and Markets Authority ESMA has its own, different guidelines for large-in-scales. Add Switzerland to the mix, and you end up with three distinctly separate regimes for large-in-scales. Obviously, this creates confusion, which is detrimental to the quality of price formation.

How does SIX Swiss Exchange tackle these issues?

Historically, our strength has always been to engage in dialogue with our clients, in order to understand their issues, build consensus and find solutions: with the market, for the market. If you look at our market structure, it’s characterized by a wide variety of trading participants with different – and sometimes opposing – needs and interests. Striking the right balance in order to find not the smallest, but the biggest common denominator is what we are aiming for.

After all, a trading platform that is stable and reliable yet fulfilling the highest demands in terms of capacity and speed, a wide range of connectivity options, functionalities and services that help improve liquidity and trading conditions on our market – these are all qualities every member will appreciate, just as much as our personal connection with them.