Euronext Rejects Shorter Trading Hours
In November 2019, Euronext received a joint request from AFME and the IA1 to consult our stakeholders on a potential reduction in trading hours and we consequently conducted a market consultation between April and June 2020.2
We consulted the markets we serve in Paris, Brussels, Amsterdam, Lisbon, Oslo and Dublin, as well as our international stakeholders in the City of London. More than 100 responses were received with views ranging from global institutions to individual employees. We thank those who responded.
This consultation marked an important moment of dialogue within the European financial community. The breadth and depth of the issues discussed, under the heading of trading hours, highlighted not only the complex and challenging environment in which our industry now operates, but also emphasised the need for frequent and constructive dialogue within our community.
Broadly, the consultation highlighted that large UK buy side and sell side firms were, in general, in favour of a reduced trading day, whereas proprietary trading firms and retail stakeholders did not favour a change, and continental brokers were largely indifferent.
As a major operator of pan-European market infrastructure, we have to consider both the potential economic impact on the EU and its place in financial world, as well as the interests of all our stakeholders from all our markets. The pandemic has also accelerated changes within the industry, with new working practices and automation. We believe that the diversity issues raised are not simply a consequence of a long trading day. These issues have deep root causes that warrant a more comprehensive, industry-wide response. For these reasons, we do not consider there to be a strong enough case to reduce trading hours today and we therefore do not intend to modify the current functioning of our markets.
- The consultation highlighted that a majority of UK respondents were in favour of shortening the trading day, while Continental European stakeholders had more diverse and less strong views on this topic. Regardless of the uncertainty that Brexit represents, the City of London and the UK asset management industry will remain inextricably linked with EU’s capital markets. As such, we must not oversimplify the debate to one of the UK vs the EU, and this decision should be made with collaboration in mind.
- There is no conclusive evidence as to whether a shorter trading day would lead to any material reduction in overall volumes. Natural orders will need to be executed in any event, although we may see a reduction in trading between market makers. Some respondents put forward the logical argument that implicit trading costs would decrease if the same volumes are concentrated over a shorter period. We find little empirical evidence to support this claim.
- We agree with the unanimous view that a harmonised approach across European trading platforms is a precondition for changing trading hours. Unilateral changes would have no impact on the quality of life and would simply add friction and complexity to European market structure. Furthermore, we do not believe that opening hours should form the basis of product differentiation. If a unilateral change were adopted in one market, we should be wary of a future cycle of competitive responses with little value added for end investors.
- Largely speaking, respondents sought to allay concerns from stock exchanges that volumes would migrate OTC and Systematic Internalisers (SIs). We take careful note of the current regulation, which obliges prices published by SIs to ‘reflect prevailing market conditions’. However, we should not discount the possibility that alternative pre-opening matching arrangements may emerge given (a) the prospect of future regulatory divergence between the UK and EU, and (b) the time zone difference between the City of London and other European financial centres.
- Retail investment is a strong pillar of the Euronext mission to serve the real economy and end investors. We agree with the majority of our retail brokers, who believe that later opening times would shift volumes to alternative, bilateral venues. In particular, we agree that there is traction for retail trades to be executed around the clock, but we share the concern of many asset managers that retail investors may pay higher implicit costs in the absence of reference prices.
- We believe that the current debate overlooks the competitiveness of Europe as a global financial centre and the economic impact on the welfare of its citizens. Europe occupies a unique geographical position between the US and Asia. We took note of the suggestion of one participant to bring the trading day forward, so that Europe can create a meaningful overlap with Asia. This would be part of a more ambitious plan to position Europe as a true centre for global trading and this deserves further debate in the context of the Capital Markets Union.
- The trading hours debate has opened the dialogue around mental health, diversity, and new talent attraction concern across the financial industry. It is reductive to assume that a trading hours adjustment is a silver bullet solution that will solve these complex problems. The issue of diversity and inclusion is one that needs to be addressed at both the organisational level, as well as collectively as an industry. We note that the Covid-19 crisis has brought about a shift to remote working and flexibility that may go some way towards improving the work/life balance of the industry.
- We note that the debate is heavily focused on cash equity trading. The proportion of cash equities staff across the industry is small, and that number is only getting smaller, as technology and automation continues to revolutionise the traditional workflows of traders. To address the issue properly, other asset classes including fixed income and forex trading need to also be taken into consideration.
The paper can be dowloaded here.
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