(Bloomberg Opinion) -- As Britain draws close to its exit from the European Union, a diminished role for the City of London looks ever more likely. This may be a gradual change, and its potential scale may be debated, but parts of the financial infrastructure built up over decades are ready to hop across the Channel.
News that Goldman Sachs Group Inc. is setting up a stock-trading venue in Paris is another reminder. Whatever happens after January’s official Brexit separation date — and whether a U.K. trade deal with the EU is agreed or not — Europe will chip away at London’s dominance.
Goldman hopes to open a new trading platform in Paris by Jan. 4, regulatory approvals permitting. Should there be no agreement to allow the trading of European shares in Britain after Brexit, the Wall Street firm’s clients will still be able to do transactions on the continent. Even if London and Brussels eventually agree to “equivalence” on their finance industry rules, expect Goldman to keep the new venue going. Equivalence can be withdrawn at short notice.
News: Goldman Sachs to Start Paris Trading Venue as Brexit Nears
The U.S. bank is by no means a trailblazer. The bigger exchanges and stock platforms with which it competes have been preparing for years to avoid disruption from the potential end to Britain’s trading of EU shares. The London Stock Exchange is due to go live with an Amsterdam platform on Nov. 30. Cboe Global Markets Inc., which dominates the trading of European stocks in London, has been operating in the Dutch city since 2019 (although hardly any stock trades there at the moment).The potential pain for London is high. Elizabeth Martin, head of Goldman Sachs’s equities execution services, told Bloomberg News that she believes the City will lose most of its trading volumes in EU stocks. About one third of European company shares change hands through various venues in the U.K., the equivalent of $10 billion a day. It’s a business that makes up about half of London’s trading volumes, according to data kept by Cboe. Firms that host this trading will want to do all they can to hang on to it, whichever jurisdiction it may flow to.
And it’s plain to see why Europe wants this business to move back to the continent. It’s not just about repatriating some of the banking talent that has migrated to the U.K., or the extra income that could be earned. It’s about liquidity. In recent years, a multitude of trading facilities have sprung up — not just in London — luring away liquidity that would otherwise belong in Europe.
Some investors prefer the status quo, which lets them execute strategies that trade U.K., U.S. and European shares all in the same spot, such as London, New York or Hong Kong. But other investors would benefit from a deeper pool of liquidity in their home markets. Execution will be better for some if trading in French shares moved over time to Paris and in German stocks to Frankfurt. A deeper capital market is what Europe needs desperately to sustain economies that remain too reliant on bank lending to finance their growth.
Still, an overnight rupture with London in January wouldn’t be in anyone’s interest. The EU hasn’t yet granted equivalence status that would allow stock trading, and myriad other activities, to carry on as usual in the capital. A smooth handoff, say a six-month grace period, would ensure no unpleasant surprises.
But the trajectory is clear. The City won’t be able to count on Europe much longer for its hegemony in financial services.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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