Financial Times: Trading costs rise after Switzerland’s loss of EU access rights

24 September 2019

Switzerland’s loss of access rights to EU stock markets has concentrated trading in Zurich while raising costs for buying shares in smaller companies, according to research that sheds light on the potential consequences of Brexit.

Banks and fund managers based in the EU were forced to change the way they bought and sold Swiss stocks in early July after a breakdown in political negotiations resulted in a ban on trading hundreds of such shares in the bloc.

Virtu Financial, one of the world’s largest market-makers, analysed $36bn of trades in the eight months to August, covering about 120,000 orders for Swiss stocks and more than 100 institutions — across all types of shares and trading venues including bank-operated private electronic marketplaces.

The loss of regulatory “equivalence” for Swiss stocks reduced investment choices and introduced friction into the market, Virtu said in a paper seen by the Financial Times. It increased costs for buying and selling companies with a small or medium-sized market capitalisation.

“While the impact to end investors from ending equivalence of Swiss stocks is not fully understood yet, we do observe increases in trading costs . . . with small and mid-cap Swiss stocks becoming 20 per cent more expensive.” [...]

Virtu found that institutional investors shifted business to the main Swiss exchange from dark pools and rivals such as UK exchanges CBOE Europe and Aquis Exchange. Average five-day spreads for Swiss stocks widened, particularly in small-cap stocks. [...]

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