SIX: Trading in 2020 and hopes for 2021 – the view from Zurich

By Adam Matuszewski, Head Equity Products, The Swiss Stock Exchange, SIX

Throughout 2020, European MTFs were unable to trade Swiss stocks – because the EU had denied the Swiss Stock Exchange equivalence in mid-2019. So, when the COVID-19 pandemic caused highly volatile stock price movements that lasted for several weeks, the Swiss market felt the full brunt of trading in Swiss shares, setting us up for an extraordinary 2020.

Despite the uncertainty, fair and orderly trading was ensured at all times within the Swiss ecosystem while managing to keep spreads tighter and recover more quickly than many European markets. Investors of any size and provenance could swiftly adjust their positions in Swiss shares based on their strategies, ultimately minimising the damage for the economy as a whole. This reliability and resilience allow financial market participants to be optimistic, should volumes surge again during a potentially sudden and vehement recovery in 2021.

An unpredictable 2020
Stock exchanges have traditionally been subject to – and designed to handle – fluctuation depending on external variables, but 2020 took this to new heights. COVID-19, international panic around geopolitics, and general uncertainty in global markets hit Switzerland like we hadn’t seen since January 2015, when the Franc was de-pegged from the Euro. Six years ago, the shock only lasted a day, whereas the impact from the pandemic has lasted months, albeit including unprecedented volume spikes in March.

Last year, some exchanges have tried to sit out the storm by closing their market and suspending trading. However, when they re-opened, all the temporary closure brought was further uncertainty in a time when investors were looking for open markets able to cope with crises. We saw this in the Philippines when the PSE closed for two days only to be followed by stock prices tumbling 30 per cent immediately after reopening. This is why scalable infrastructure has become increasingly important; it allows for a more seamless response to unforeseen circumstances, and is one of the reasons why ensuring functional market infrastructure continues to be a key focus for us in the coming year.

Lessons learnt
Besides offering the Swiss Financial Centre a chance to prove its stability and resilience, the extraordinary circumstances caused by the pandemic against the backdrop of non-equivalence also provided a unique opportunity to investigate the impact of liquidity consolidation on the market quality. Ever since the Market in Financial Instruments Directive (MiFID) entered into force in 2007, liquidity in equity trading was fragmented across several trading venues; now the effects of liquidity consolidation could actually be assessed on key areas such as trading activity, order book quality and prices. The results clearly show that spreads have been largely unaffected, and depth of liquidity has actually improved. Further, trading became more efficient as evidenced by lowered Order-to-Trade ratios and less ghost liquidity spread across venues.

So, despite the undeniable benefits of competition introduced with MiFID I and MiFID II, what has been clearly confirmed by our research last year is that liquidity consolidated in one place tends to be more resilient to volatility shocks than liquidity that is fragmented over several venues; and obviously, search costs are reduced to zero. Based on these facts, I think we should embrace a new debate on market structure that addresses the question how much competition is beneficial for the market and at where we might reach the tipping point where its downsides outweigh the benefits.

This debate about the future of trading should include the perspective of exchanges and all market participants, including the buy-side, mid-tier and smaller market participants.

Outlook for 2021
When looking back at 2020, it makes it hard to predict with accuracy what’s to come in 2021, as the past year has shown that anything can happen. But despite all the new uncertainties that Brexit might bring, it could end one – by reigniting competition for market share in Swiss stocks in 2021, even if the equivalence status of the Swiss Stock Exchange will not be reinstated by the EU. The reason is simple: most MTFs where Swiss shares could be traded are located in the UK, so we expect the market will start finding its new balance between liquidity on the primary exchange and alternative trading platforms.

Ultimately, we hope to see a return to normality within the trading ecosystem, and more healthy competition for stock exchanges. We know 2020 has been a difficult year. However, opportunities await, and we’re optimistic for the future developments in Swiss and European equities for the years ahead.

Adam Matuszewski
Head Equity Products
The Swiss Stock Exchange, SIX