The London Stock Exchange group on 10 December 2019 came out with a consultation paper asking its participants to give opinions and suggestions on shortening of trading hours on the London Stock Exchange. The exchange among all the exchanges in Europe, Americas and Asia has one of the longest trading hours of eight and a half hours. While originally envisaged to garner more business than its American and Asian counterparts, the move now seems to have lost the cost-to-benefit game. The cost of mental health of long working market participants, their family commitments and gender diversity are considerations now being put forward by leading associations in the industry like The Investment Association, a lobby group of asset managers in United Kingdom and the Association for Financial Markets which represents trading firms and banks in Europe.
The lobby groups while admitting that there will be some loss of business, point out that with the above three human factors improving, the advancement in individual productivity will benefit all. The consultation period which closes on the 31 of January 2020, has three proposals for market participants to respond to. The first of them is that the trading should start late by about half an hour, second that the closing time be advanced by at least an hour and the last proposal being that the current timing system should not be tampered with. Among the problems that the market participants sight are the overlapping working hours between the European, Asian and the American markets which creates serious workload problems especially during the margin hours between the various exchanges. However, these overlapping hours among the major exchanges of the world are responsible for a majority of the cross broader trade. Squaring off trades on the same day saves a significant amount of settlement time with the consequence that a greater number of trades can be processed in a single day. However, with the increase of volume of trade everyday on the exchanges, the capacity to handle so many trades are being tested both on humans as well as on technology. One argument that can be put forward in favor of shortening of trading hours is that participants will only trade so much no matter what the trading hours are, the difference will only be in the number of transactions, which in any case is beneficial as it will make cost of trading for investors and fund managers lower and on the other hand will cut down on the workload of the various participants.
The economic downturn and the headwinds of Brexit has had a defined impact on the investment management industry in Europe. The Industry while reeling under losses has only put more stress on the market participants with a little or no enhancement in their compensation. Now it seems that the participants are seeing the right opportunity when the economic downturn is about to reverse trend that they could push forward the case of their welfare.
The case being put forward by the industry bodies while having a lot of merits will be faced with a lot of resistance as well. While associations may very well speak of employee welfare, but the companies will certainly not be comfortable with the loss of business, especially when the business environment across Europe is improving and the investment management industry is raring to go. Second it will be a tough affair to bring all the major stock exchanges in Europe on the same page on the issue. Currently only the London Stock Exchange has initiated such a consultation process and other trade bodies across Europe have not been able to persuade other exchanges to follow suit. In the absence of a consensus among at least majority of the primary Stock Exchanges across Europe this proposal will be very difficult to implement across only one Stock Exchange. Finally, there will be numerous regulatory hurdles for the implementation of the above proposal. The regulatory bodies and the British exchequer may not see the issue with the same eyes as the industry bodies do, for them the normal business timings across all sectors would be a more important consideration while deciding what should be the usual business timings of this industry. Among the other structural factors at play, which could have a say in the implementation of these reforms, is the tendency among investors to wait till the closing auctions to buy and sell, rather than making trades through the course of the day, which some industry experts believe is the result of the phenomenal growth of the Exchange Traded Fund (ETF) industry that rely heavily on the end of day prices of securities.
The consultation process will however help in gauging the general mood among the participants about the proposal including that of their employers. The divide thus will help determine how far this movement will go and whether the London Stock Exchange will be the torch bearer for other exchanges in Europe. Other than the above, the consultation process also asked participants more than twenty other questions ranging from the liquidity of small-cap securities, the effect of MiFID II rules on research and whether the timing of its intraday auction process could be changed to boost liquidity in the markets.
The consultation process should be seen as an initiative of the London Stock Exchange to bring about greater reforms in its workings and the investment management industry in the United Kingdom at large. The reforms in this industry are long overdue, with its need being felt the most during the recent times of economic downturn and the Brexit turmoil. While the need for these reforms may have been felt before, but because then the London Stock Exchange was to an extent regulated under the European Union Framework it could not have brought it out into the open so vocally. However, now that it is officially going to separate from the European regulations, it remains to be seen how far it can take ahead this proposed reform process.
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