The past year of all our lives has been defined by people failing to understand exponential processes. It’s slightly worrying, then, to hear financial professionals in London saying the amount of business that’s shifted to European financial centres since Brexit is not that big. Nearly everything is small to begin with. The trouble is that things grow.
In itself, as William Wright from the New Financial thinktank says, the fact that Amsterdam has overtaken London in terms of equity trading volume is unlikely to make much difference to anyone’s profit and loss account (or a country’s tax-take). Measuring trading volume is in any case something of an abstract concept, which these days depends more on the way in which computer algorithms split up orders to get the best price, than the actual amount of business. The commission on equity trading is incredibly low and the exchange fees even lower.
But there is a reason why stock exchanges compete so aggressively to be number one in market share. Financial market trading is the ultimate case of increasing returns to scale – the more business you do, the easier it is for someone to find a buyer or seller, and so the more attractive a place you are to do business. And the same dynamic works in reverse. When you get a negative shock to your market share, it also tends to be self-reinforcing. London also lost huge market share in January in euro-denominated swaps trading.
The immediate cause of all this is that the UK failed to negotiate an “equivalence” deal with Europe for its trading venues after Brexit. For the purposes of EU regulation, a number of British trading platforms ceased to exist at the end of 2020. As the governor of the Bank of England, Andrew Bailey, says, there’s a sense in which this is unfair – Europe was happy to deal on these platforms six months ago, and will be happy to deal on them in the future, and has indeed given temporary extensions to some of them where it really can’t replace the UK. There is a legitimate interest on the part of the Europeans in wanting control over their own financial system, but when one compares the British authorities, imperfect as they are, to the people who ignored whistleblowers over fraud at the German payments giant Wirecard for years, it’s hard to believe that there’s not a little bit of sneaking mercantilism going on. An unpleasant fact of the matter is that both the UK and Europe are behind the curve, technologically, when compared with either the US or Asia, which makes the fight to preserve market share within the central time zone that little bit more vicious.
We should have expected to see that any market share losses would first be seen in electronic business lines, where you can respond to a change in status by simply rerouting payment instructions – in this case chiefly to Amsterdam. The higher value-added advisory activities involving actual people are considerably more sticky, but in the end, they tend to follow the trading. It’s noticeable that Numis, one of the most successful British domestic brokerages, has opened an office in the EU. These things start as a workaround to meet regulatory obligations, but they tend to grow as people follow the money.
The trouble with this sort of development is that, like any other exponential process, it creeps up on you slowly and then suddenly it’s too big to do anything about. For the time being, the economic impact is small; the computer servers might be in Europe but the people placing the orders are still in London. The problem is that every year, the financial markets employ fewer people and more computer servers. Historically this hasn’t been a major issue for employment; as one financial market gets automated, the human beings move on to another area where the products are more complicated and the margins are higher.
Here’s where difficulty emerges: where will those new markets be? International carbon emissions permit trading also appears to be centralising in the EU. The danger to London as a financial centre is not that existing business will move, it’s that in the future, new things will happen somewhere else. As the proverb goes, the stone age didn’t end because we ran out of stones.
When I was growing up in north Wales, there was a sort of ineffable sadness attached to the fact that so many of the slate mines and railway workshops and even farms had been converted to industrial museums, where former workers spent the day pretending to do their old jobs for the entertainment of holidaymakers. There’s no reason this couldn’t happen in finance; even before the pandemic, the trading floor of the New York Stock Exchange existed almost entirely as a backdrop for news broadcasts. If enough of the electronic business relocates out of London, we may yet witness the sight of British bankers pointing theatrically at Bloomberg monitors and shouting scripted remarks into dummy telephones, as a convoy of tourists walks past, led by a guide who used to be co-head of global derivatives. I remember when it was all screens around here …