Introduction
The London Stock Exchange (LSE) is one of the largest stock exchanges in the world. When the UK voted to leave the European Union in June 2016, it set in motion a process known as Brexit. There has been much speculation about how Brexit will impact many elements of the UK’s economy and financial services sector. One area of interest is how Brexit could affect trading volumes on the LSE.
Reasons Why Trading Volumes May Fall
There are several reasons why trading volumes on the LSE may decline as a result of Brexit:
Loss of EU-wide ‘Passporting’ Rights
Currently, UK financial services firms have passporting rights which allow them to operate and sell products throughout the European Economic Area (EEA). However, if the UK leaves the single market these passporting rights could be removed. This may result in international banks and financial services firms relocating some operations and activities out of London to continue serving EU clients, which could reduce trading volumes.
Increased Operating Costs and Barriers
Without an EU-UK trade deal in place, trading between the UK and EEA could be subject to new tariffs and custom controls. New barriers like this could increase costs and make trading in some instruments less attractive, reducing volumes on the LSE.
Economic Impacts and Uncertainty Suppressing Trading
The UK’s withdrawal from the EU single market may impact business investment in UK stocks and shares while the country’s economic prospects and trading relationships are renegotiated. Prolonged uncertainty has the potential to dampen trading activity.
Factors That May Cause Volumes to Rise
While the threats to trading volumes are credible, there are also strong reasons to expect London to maintain healthy trading activity:
Strong Track Record and Infrastructure
London dominates Europe’s institutional fund management market and has built an unrivalled position as an international finance hub over many decades. Its trading infrastructure, expertise, asset manager networks, and supportive regulation give it innate advantages that may withstand Brexit impacts.
Potential Influx of International Listings
Freed from EU regulations, the LSE could choose to relax listing rules and attract greater numbers of fast-growing companies from Asia and emerging markets. If matched with promotional efforts, London’s capital markets may offset reductions in EU listings.
Volatile Markets Can Boost Volumes
If Brexit impacts cause wider market volatility and price fluctuations across UK and EU stocks, volumes can increase rapidly as traders take active positions to benefit from or hedge against price movements. Periods of exceptional volatility often correlate with surging trade volumes.
Conclusion
There are solid arguments on both sides of the debate around how Brexit could affect trading activity on the London Stock Exchange. While disruption to existing access rights and relationships present a threat to volumes, London’s entrenched strengths and likely efforts to implement alternative growth strategies after Brexit suggest ongoing hefty trade volumes can be sustained. The ultimate outcome rests critically on the results of the UK-EU negotiations now underway.