London is the biggest center for foreign exchange transactions in the world. Despite the Brexit, this statement is still valid today and is likely to be valid for the foreseeable future. Not only do banks have to relocate talent, which is a costly and difficult process, they also need brand new infrastructure if they want to replicate London’s trading conditions.
The exit of the UK from the European Union was triggered after the official Article 50 letter was sent by Theresa May to the President of the European Council, Donald Tusk. The months in the aftermath of the vote for Brexit have been tumultuous for the trading industry in the UK.
Despite the threats that the country’s financial industry may come crashing down, this hasn’t happened for now. If anything, some companies are very optimistic about the future. The CEO of CMC Markets, Peter Cruddas, a vocal proponent of Brexit, was one of the backers of the Vote Leave campaign.
UK and EU Financial Regulation
Over the past couple of months, the Financial Conduct Authority (FCA), the UK’s financial watchdog, hasn’t given in to pressure for looser regulation on the financial industry. On the contrary – it has announced that it is considering major changes to the retail broking space, a move that has a number of industry executives worried about the future.
The regulatory outreach of MiFID II is still valid in the UK and the FCA has shown no signs that it intends to have anything else in place. EU regulations regarding the financial sector appear to be valid in the UK.
London’s Trading Infrastructure Dominance
Optimism in the trading industry reigns supreme for the time being. Politicians in the UK and in the EU can be reckless, but senior executives appear confident in a reasonable deal between the parties in the coming tough Brexit negotiations.
The modern infrastructure that has been created in a 30-mile radius around London, which is the biggest market for foreign exchange transactions by far, is one key component of the resilience of the industry. According to the Bank of International Settlements, around 37 percent of global FX transactions take place in London.
Commenting to Finance Magnates, Dan Marcus, CEO of ParFX and Global Head of Strategy and Business Development at Tradition, said: “The geographical location is not necessarily a barrier to trading and it is theoretically possible for trading and liquidity to shift from one jurisdiction to another if the conditions are more favorable.”
“But the likelihood of this occurring varies; some products tend to be more regionalized and rely more on the underlying local end-user generated business and some rely on latency optimization, so require proximity to the venue and are therefore are difficult to shift,” he elaborated.
Curtis Pfeiffer, Chief Business Officer at Pragma, which is a provider of multi-asset algorithmic trading tools, adds to optimism: “Pragma is expanding its equities and FX business. Our investment in the data center at Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally. The banks we service need state-of-the-art trading capabilities for their traders and buy-side and corporate clients, making LD6 a natural fit.”
“Despite the uncertainty caused by Brexit, we are moving forward with this large capital expenditure because London, as the largest FX trading center in the world, hosts the largest datacenter ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” he explains.
The CEO of ParFX added that fears about London losing its title have been exaggerated. According to Marcus, London has a lower cost of capital in comparison to other European countries which makes it a compelling place to do business.
“When trading becomes concentrated in a particular region and is supported by a comprehensive legal and regulatory environment it develops natural strengths that enable that particular market to function well. By leaving that pool of liquidity, a firm could disadvantage themselves and their clients,” Marcus concludes.
Easier to Relocate Talent than Infrastructure
After the UK leaves the EU, some financial institutions will relocate talent to other European cities, but the datacenter presence for their trading applications will remain in and around London. The latter is especially valid for FX and derivatives trading.
“As speed has become and will remain important to trading in electronic markets, institutions will be reluctant to leave the data center ecosystem in London. It has increased in size significantly of over the last 10 years as a result of a network effect – everyone wants their trading servers to be where everyone else’s are,” Pfeiffer explains.
With the substantial technology and bandwidth requirements that trading applications have, low-latency connectivity to trading venues and counterparties will remain key. Any significant challenge to London would take years to complete and will require significant capital expenditures.