Though Switzerland is technically in the European Union (EU), the country is banned from trading many shares in the bloc because of negotiation breakdowns back in July 2019. This has limited traders who want to work with the EU stock market.
Given the fact that UK is on the brink of Brexit, traders are keeping a close watch on the Swiss trading market as they expect the UK traders to be in a similar position as Swiss traders.
The result of failed negotiations has hurt the Swiss market and has caused a concentration of trading in in Zurich. An additional effect was that buying shares in smaller companies became more expensive. The increased prices for buying and selling are due to the fact that Swiss stocks lost their equivalence to normal EU stocks. Additionally, the fewer investment choices caused problems in the local market.
This was gathered based on the research carried out by Virtu Financial. The company did analysis on $36 billion worth of trades during the first 8 months of 2019 which covered 120,000 traders for Swiss stocks across more than 100 institutions.
In its report, Virtu Financial wrote
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.
Additional Effects
The reason for these trading difficulties are mainly because of stalled economic negotiations. The EU dropped the equivalent status that Swiss stocks had in the EU market because of this. The Swiss government retaliated by imposing a ban on trading Swiss equities in the EU market.
Besides the increased prices mentioned, Virtu discovered that many institutional investors decided to shift their business because of these changes. They ended up in rival exchanges like CBOE Europe and Aquis Exchange, who are both based out of the UK. Because of the shift, the average five-day spreads for Swiss stocks widened on the market.
Thomas Zeeb, the CEO of the Swiss Stock Exchange, noted that Swiss trading volumes actually went up since there is now a single pool of liquidity. The problem is that the spreads dropped by 19 percent.
With the prospect of no-deal Brexit on the horizon, the effects on the Swiss market may be duplicated in the UK market, especially if proper preparations are not done. The British government is asking for the EU to issue temporary equivalence permits to countries and institutions so that market disruptions will be minimized.
