Brexit shakes up EU trading landscape: ESMA

The U.K.’s exit from the European Union resulted in a sharp drop in trading volume, and increased concentration and specialization in Europe’s markets, according to new research from the European Securities and Markets Authority (ESMA).

The report found that markets faced a significant decrease in trading volumes, with volumes dropping by almost half (down 46%), and trading in non-European shares falling 54%, since the U.K. left the EU.

Post-Brexit, the share of European trading increased from 55% in 2020 to more than 70% in 2022, ESMA reported, with the proportion trading over-the-counter declining to 22%, and systematic internalizers seeing their share dropping in half to around 6%.

Before Brexit, volumes were about evenly divided between regulated markets and multilateral trading facilities (MTFs). Post-Brexit, more trading has taken place on regulated markets — up to 40% of total trading from 29%.

Additionally, the research found that post-Brexit trading volume was highly concentrated by location, with the Netherlands capturing 57% of the volume on MTFs, France accounting for 29%, and Germany hosting 9% of trading.

“This is linked to the migration of some of the volumes traded on U.K. MTFs to the Netherlands’ MTFs,” it said.

Trading on regulated markets was more evenly distributed among countries, the regulators found — led by Germany and France (at 24% and 20%, respectively), followed by the Netherlands (12%) and Italy (11%).

Additionally, the research found an increase in specialization by trading venues, with MTFs particularly focusing on dark trading, and on trading venture companies.

“The European share trading landscape appears to be significantly more fragmented if compared to the U.S. markets,” the report said, noting that the large number of alternative trading venues and systematic internalizers only decreased slightly in the wake of Brexit.

With a large number of trading venues competing for a share of much lower trading activity, market fragmentation is high, and trading volumes in the EU remain low relative to the U.S. markets, it also noted.