Finding a New Balance

Finding a New Balance

Christian Reuss, Head SIX Swiss Exchange, talks about his learnings from an exceptional year in trading and his expectations for 2021.

As 2020 enters its final stages, what is your conclusion so far?
Christian Reuss: It’s been an extraordinary year, for various reasons. Due to the equivalence discussion impasse between the EU and Switzerland, European MTFs have not been able to trade Swiss stocks, so our market share has risen to almost 100%. In addition, the Covid-19 pandemic caused highly volatile stock price movements. But compared to 15 January 2015, when the Swiss Franc was de-pegged from the Euro, the volatility shock did not last for just one day but for several weeks. This in return lead to almost unprecedented volume spikes in March and cumulatively over following weeks and months.

How have you dealt with these circumstances?
With regards to the market turmoil, we fulfilled one of our core functions in the financial market, which is to ensure fair and orderly trading at all times. Open markets are crucial for investors to cope with any kind of crisis by adjusting their views and being able to act on it. Closing exchanges only increases uncertainty as we have seen in the Philippines: during the crisis, the exchange closed for two days and when it reopened, stock prices were down by 30%. To keep our market open, we could yet again rely on our dedicated employees as well as our very stable and scalable infrastructure – both delivered outstandingly.

As for the extraordinary circumstances caused by the non-equivalency: it has offered us a unique opportunity to investigate the impact of liquidity consolidation on the market quality as well as reflect on the impact we’ve seen in the key areas such as trading activity, order book quality and prices.

Are there any lessons you can draw?
When the Market in Financial Instruments Directive (MiFID) entered into force in 2007, the regulator effectively introduced competition to Equities trading. As a result, liquidity was fragmented across several trading venues with different levels of regulation. As you can imagine, some trading venue providers were not excited about the EU declaring the Swiss Financial Center non-equivalent and – more importantly in this context – the Swiss Federal Council effectively countering that measure. So when trading volumes in Swiss shares were again concentrated on our market, some concerns were raised that as a result of this concentration overall trading volumes would decline, spreads widen and trading costs go up.

And has any of this actually happened?
As it turns out, we found the opposite to be true. We found that pooling liquidity in one place rather than spreading it around several venues offers tangible advantages to many market participants and the investors behind them. This is what a few of our latest publications are about – my own article “Trading Swiss Equities – Lessons from the Non-equivalence and 2021 Outlook” and of course the fifth edition of our very successful Trading InfoSnack series. 

Can you be more specific about the effects of pooling liquidity?
First of all, our observations clearly indicate that liquidity consolidation has not lead to a decrease in the total turnover in Swiss Equities. Furthermore, we have seen that spreads on the Swiss Stock Exchange were largely unaffected and depth of liquidity has actually improved as a result of consolidation. Spreads only widened during the very first weeks after the non-equivalence regime started, and of course when uncertainty increased during the Covid-19 pandemic this Spring – although this has been the case on all primary exchanges. Compared to our peers though, spreads on the Swiss Stock Exchange remained the tightest and also recovered more quickly.

What about costs?
Our research indicates that liquidity consolidated in one place, like in our case today, is more resilient to volatility shocks than liquidity which is fragmented over several venues. This is particularly important when evaluating the so-called implicit trading costs. We’ve also looked at metrics like the order-to-trade ratio, which improved on our Exchange from above 6 to below 4. So trading efficiency has increased.

So there also even seems to be a negative side to fragmentation?
I guess it’s fair to say that every coin has a flipside. On one hand, fragmentation fosters competition to the benefit of the entire market. On the other hand, when a a certain threshold of liquidity fragmentation is passed, the benefits are overtaken by increased market complexity, and as a direct result higher searching costs for liquidity as well as an inefficient replication of infrastructure and operational resources. In this context, we embrace the debate on market structure that includes the perspective of all market participants, including the buy side, mid-tier and smaller market participants, to avoid reaching a tipping point where complexity outweighs the benefits of competition.

Looking forward, what is your outlook for 2021?
We expect a bilateral agreement between Switzerland and the UK to be struck, which is very likely to result in London based MTFs re-admitting Swiss stocks to their trading universe. I consider this a return to normality, which is anticipated and welcomed by market participants. We at SIX are also in favor of open markets, as we have consistently emphasized ever since the equivalency debate started.

So you’re not worried about competition?
Not at all! I believe that competition pushes us forward, keeps us close to market participants and allows us to demonstrate our innovative capacity. In fact, the competitive aspect of equity markets is something that we have embraced a long time ago, and we never changed our attitude – even with almost a 100% market share. So we have continued investing in our platform and functionalities to meet clients’ needs and keep up with market trends.

The competitive aspect of equity markets is something that we have embraced a long time ago, and we never changed our attitude – even with almost a 100% market share.

Do you have some concrete examples?
In 2020, we have rolled out a Trading-At-Last session that allows participants to exchange orders at the closing price, and we are about to launch an alternative ETF Quote-On-Demand market model which resembles RFQ workflow and offers participants an alternative to the existing on book liquidity. We have also introduced some amendments and promotions on trading tariffs over the past 18 months designed to generate some trading cost efficiencies for our members.

And what’s in the pipeline?
We have started our work on Conditional LIS order functionality for SwissAtMid, which will allow our members to better source block liquidity and is planned for go-live in 2021. Furthermore, once competition with the MTFs starts again, we can reactivate Swiss EBBO. This service offers trading participants looking for best execution a unique and innovative way to trade Swiss shares. With a single order, they can access three liquidity pools: CLOB, SwissAtMid and Swiss EBBO. The simultaneous execution across the three distinct order books maximizes the liquidity an order can interact with and ensures participants are always obtaining the best available price for their limit order on the Swiss Stock Exchange.

It sounds like you’re confident to retain some of that market share you currently hold?
When competition in trading Swiss Shares is re-instated, we expect the market to find its “new balance” between the liquidity on the reference market and alternative platforms. I’m optimistic that our lit and non-displayed books will remain the most attractive choices for market participants and we are – as always – working closely with the industry to further enhance our proposition.


Christian, thank you for this interview.