So the Brexit has finally happened. The equity, forex and bond markets are still reeling from the news, the volatility probably caused as much by the fact that Brexit was unexpected as of yesterday night in the UK as by the event itself.
While the overall impact will reveal itself over the next several years, in the next few months the capital markets would have to deal with issues such as the future of the LSE-DB merger. Does it make sense anymore, and if yes, how do the two parties proceed? One would expect that now there would be political pressure to ensure that trading and jobs do not move away from either London or Frankfurt. Keeping all stakeholders happy would be a more complicated affair, although it could still be done.
EU wide market infrastructure regulations such as T2S and MiFID II would also now be seen in a new light. London was seen as the financial capital of Europe. The EU would now have to proceed with these significant changes at a time when the UK is preparing to exit, and is weighing its options in terms of how best to deal with the rest of Europe. It could take a middle ground as Switzerland has taken, or position itself even further away with more legal and policy independence but less overlap with the European capital markets.
In an earlier blog that considered the possibility of Brexit, I stated that technologically this might be the best time for an event such as the Brexit. Technology is more advanced and we are better connected than ever before across nations and continents. However, undoubtedly there will still be significant impact from an economic, financial and demographic point of view. As always, there will be winners and losers. As a neutral, one hopes that the people in the UK are able to achieve the goals they had envisioned in making this decision.
- Scenario for the SD2C to keep a slot on the desktop is a combination of extremely modernized chinese walled and balance sheet optimized platform that aggregates, routes and matches as much investor flow as possible (some of it coming from MD2C RFQ platforms, some of it not) but also takes part in a Multidealer (not to client) consortium-like platform for their unmatched inventory and/or for the large size enquiries/indications of interest of their clients? It could be that some clients prefer to have 2-3 really good relationships with 2-3 dealers that have SD2C platforms that serve their particular needs (algos, primary issues, inventory, etc), and use their desktop space for these 2-3 venues rather than having to link up to the many MD2C platforms.
- Scenario for the MD2C to keep their currently extremely robust slot in the desktop of investors, before all investors get extremely robust OMS and EMS technology to buypass the MD2C (not soon!) or go for the SD2C-only route, could be to enable wholesale, institutional and retail flows to interact. In CDS indices (which are liquid) we have seen how Tradeweb has gained more than the majority of market share by doing that (and not only): enabling investors to stream wholesale liquidity. Could it be done in corporate bonds? There is currently no interdealerbroker (IDB) e-trading taking place in corporate bonds but could a MD2C platform add that IDB2C functionality? You can read more about IDB2C in The Blurring of the IDB Vs. D2C Models in Fixed Income and FX report. The alternative would be for the MD2C to offer the credit OMS/EMS technology to investors, and some are already working on this.