With a “Brexit Day” of March 29 looming, Britain and the EU are trying to strike a deal on terms of the departure.
What will it all mean for the capital markets industry? Markets Media recently caught up with Bill Fenick, Vice President Enterprise at co-location and data-center services provider Interxion, to discuss.
What’s the situation on the ground with regard to Brexit?
Since the Brexit vote (in June 2016), a lot of speculation has surfaced around London’s financial community and where the community might go post-Brexit. Many cities have been named -- Paris, Amsterdam, Frankfurt and Dublin being the most prominent. But building up a financial centre in a particular city from one day to the next is not an easy task.
What is the history of London’s trading sector?
Low-latency trading took off in the late 1990s with the onset of cheaper computational power, more sophisticated exchange trading technology, and the demutualization of exchanges. When MiFID I introduced the concept of a Multilateral Trading Facility in 2006, most MTFs (Bats, Chi-X and Turquoise being the best known) located in London. The MTFs were able to trade shares that had been traded only on the National Exchanges in Europe, from one location, and with speed as an important factor. This made London a primary place for electronic trading.
Then in 2008, Euronext moved its trading systems from Paris to London. London was by then the pre-eminent global hub for trading, with equities on the LSE, Euronext and various MTFs; derivatives on Liffe; and FX trading on EBS and Reuters. Exchanges outside of London set up Points of Presence (POPs) and fast telco lines into London to attract liquidity from algo traders.
There was a lot of consolidation of MTFs and exchanges from 2010 to 2016, and during this time London remained the best European base for high-frequency shops.
Why does history matter when assessing Brexit?
London has grown its low-latency electronic trading capabilities over a long period of time. The financial and technological cluster that has grown in London over the past 20+ years cannot simply be uplifted and moved to another city. There is intellectual capital as well that could not be replicated easily.
London still has the bulk of overall European liquidity -- the share is about 65% in equities. Many of the London-based exchanges are worried about jeopardizing the liquidity that they have fought so long to achieve. They do not want to make a rash decision to move their matching engines away from reliable liquidity.
What have you seen in the market since June 2016?
Since the Brexit vote, exchanges and financial institutions have set up administrative offices and legal structures outside of London in the EU. While still hosting trading systems in London, they are segregating UK instruments from European ones on different hardware and hosts – so from a systems perspective, there is a clear demarcation.
If, however, a “Hard Brexit” were to emerge, exchanges could lose business to pure Euro players. This possibility is why most financial institutions are setting up new venues in the EU countries -- these would be separate liquidity pools with their own rules and regulations, but trading would still run on the tech infrastructure in London.
What is the near-term bottom line with regard to Brexit?
We do not foresee exchange trading infrastructure moving out of London in the near future. Although there might be a lot of noise about banks, trading firms and exchanges setting up posts in other European cities, the core trading infrastructure will remain in London for the foreseeable future.
In a broad sense, across industries, global mobility gets easier all the time, which means lower barriers to shift business. But financial trading relies so much on location and existing fiber assets that it would probably be the last component of the market to shift.
If the EU mandates the notion of data sovereignty for the trading/matching engine, then a new analysis would have to be undertaken to see where trading might move to. It is foreseen that by then however, technology will have disrupted the market, e.g. technology will move faster than the regulators (new innovations in synchronized nanosecond time-stamping rendering location irrelevant, for example).
What about in FinTech, which has boomed in London in recent years?
I think the biggest deficit that Brexit will bring in the short term is the opportunity cost of expertise that would have come to London -- university grads, mathematicians, physicists, what have you, from Austria, Spain, France, Denmark, and anywhere else.
One of the biggest sources of intellectual talent for fintech right now is Estonia – many have founded their firms in London as the place to be for fintech. Where does the next fintech wave go? Probably not London. Why would an Estonian come to London and have to fight through bureaucracy around residence permits and such, when they can just settle in Germany, for example, friction-free?
So you're losing a community of people, the type of which made London what it is today. That's a big opportunity cost.
Will London remain a world-class financial center?
Absolutely. London is an engine of growth -- not just for the UK, but for Europe -- and it has reinvented itself many times throughout history. It will reinvent itself again.
