What has been the effect of Brexit on MTF venue competition and liquidity?
Now that the dust has settled after Brexit and Europe is dealing with the new cross border arrangements, we can begin to get an idea of the new post-Brexit market structure by comparing market characteristics for the month before Brexit in December with those in January and analyse what has changed over this period.

The main questions will be around the trading on the new EU MTF venues. Have EU participants migrated fully to the new Venues for European stocks? If so, are any differences observed in trading characteristics across UK and Europe.

Our “first look” findings are that while spreads have not changed, there has been a significant decline in the amount of liquidity available for certain stocks. We examine the leading European trading indices as proxies for the various national markets.

Have spreads been affected?

Post-Brexit, all of the major MTF’s have spun off separate European entities with the exception of BATS, which has remained UK only. This might have led to an easy inference that spreads would remain constant in the UK as all venues are still in place. However, comparing average spreads on all the Venues for FTSE 100 stocks, it is apparent that spreads on BATS which formerly tracked very closely to Turquoise, now has a clear divergence, from under 2-basis points at the beginning of January to over 4-basis points at the end of the month, which suggests some of the liquidity came from European participants. All the other Venues are tracking similar spreads to those in December.

Figure 1:
In comparison, if we use the spreads on the old Venues and draw as a continuum into January the new European Venues for the CAC 40 instruments on Paris (Figure 2), there appears to be no significant change to spreads, other than the normal seasonal widening around the end of the year.

The one significant difference in the market structure for CAC stocks is the absence of a BATS Venue and raises the possibility that its use as a separate liquidity source was limited.

Figure 2
Market Liquidity

As spreads have not changed for European stocks, the second question on market quality is the effect on liquidity.  Available liquidity is a major factor in any trading strategy.  For the liquidity measure we will use the average value available at a 10-basis point depth on either side of the Order Book, and aggregate across the total available liquidity on venues for the FTSE 100, CAC-40 and DAX-30 instruments. From this measure shown on the chart (Figure 3) the total value available in liquidity has decreased significantly post Brexit. The largest impact has been on the DAX-30 of an average reduction of €200k in available liquidity at 10 bps per day.

Figure 3
This represents a significant reduction in liquidity across Europe. This may be the result of the absence of the BATS Venue as a potential liquidity pool. From the pie chart (Figure 4), we can see that BATS had previously accounted for an average of 6% of the available liquidity at 10bps in these Index names.

Figure 4
It is clear there is less competition now in Europe post Brexit, but there is an argument on the true nature of the liquidity on the Cboe BATS Order Books given the options for executing orders between both BXE and CXE Order Books.

For now, though, we still have at least four venues providing competing prices and liquidity on liquid instruments across Europe.

In the UK the five main MTFs continue to operate and offer prices on European stocks, but the liquidity and spreads are erratic and possibly used for Principal reference price pricing on UK participants orders only.  

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For more information, please contact:
Henry Yegerman
Associate Director