January 31st 2020 saw the moment at which the UK officially left the EU. This has been proclaimed as meaning that the government has ‘got Brexit done’, of course, but the existence of a transition period up to December 31st and a huge degree of uncertainty as to the exact form that Brexit will take mean that it is a process which has really only just begun. In the midst of the current COVID-19 crisis a topic like Brexit, which dominated every news cycle and political calculation for months and years on end, can seem a trifle insignificant. The fact of the matter, however, is that the UK, and indeed the world, will move beyond COVID-19 at some point, hopefully with the minimum possible harm to life, and at that stage, the durability and robustness of financial infrastructure will play a vital role in leading the way back to normality.
It’s worth considering, therefore, the impact which Brexit, both its earliest manifestations and its eventual shape, will have on the working of forex markets in the UK. For a while, there seemed to be an assumption on the part of many commentators that Brexit would never really happen or that it would be couched in such ‘soft’ terms that it would have minimal impact. Then, when it became clear that not only was Brexit being delivered, but it was being delivered by a government seemingly set on delivering as hard-line a version as possible, the thinking shifted to the negative effect it could have on the financial markets. Tales of banks shifting employees and premises to mainland Europe were held up as an indication – if not actual proof positive – that London would, post-Brexit, lose its pre-eminent position as a financial services hub.
The forex markets represent perhaps the crown jewel of the UK financial services sector, and there was much speculation that the reality of Brexit would impact negatively on that position. According to the Bank for International Settlements (BIS) triennial survey published in September 2019, however, the imminent arrival of Brexit has done little to shift London from its position. According to the survey, daily trading volumes on the global forex markets had risen by 29% since 2016, to hit the $5.1 trillion mark, a figure which saw London’s daily share of volumes rise from 37% in 2016 to 43%. At the same time, the US share of the markets went down from 20% to 17%.
There are a host of reasons why London will continue to flourish in this way even after Brexit happens, and they all centre around the shift towards an individual, centralized hub for trading, and the fact that London represents the natural choice for this hub due to factors which are larger even than the political forces shaping the UK exit from the EU. These factors include elementals such as the growth and embrace of new technology, pan-national legislative changes and, underpinning everything, simple geography. In the past, these factors have driven trade to London and helped to create a pool of skilled individuals unrivalled anywhere in the world. This has created a positive feedback loop that sees the most successful and highly motivated people gravitate toward London precisely because that’s where you tend to find all the other most successful and highly motivated people.
To take the factors driving London’s success detailed above in reverse order, its geographical location puts it in the perfect position in terms of time zones to take advantage of the overlap between the opening and closing times of the US markets, the UK markets and the Asian markets. In simple terms, the accessibility and liquidity which makes forex markets so appealing is at its peak when this overlap occurs. This is something which have been recognized for quite some time, but it took the introduction of the Markets in Financial Instruments Directive, commonly known as MiFID II by the EU in 2018 to provide the confirmation. MiFID II was created to instigate a more level playing field across a range of different financial markets, at the same time as protecting investors and ensuring more transparency. It was this commitment to transparency which enabled a whole new raft of data on transaction cost analysis to be gathered, and this data proved what many traders had always instinctively known, that trading costs are lowest when liquidity is at its best, and that forex liquidity peaks when the London time zone overlaps with the Asian and American.
The time zone issue alone would not be enough to explain the on-going, Brexit proof durability of London’s dominance were it not for the fact that the technology to take advantage of it is also being developed in the city. This means the development of algorithms on day trading platforms, which are often programmed to seek out and take advantage of areas of greatest liquidity. This shift toward the latest tech has been mirrored in the emergence of fintech companies in the UK as a whole, where approximately 76,500 people are employed in the sector according to a City of London report, and in London itself, which saw a 61% growth in fintech jobs over 2019. These firms provide a range of services, from data analysis to offering programmes which knock milliseconds off trading times, and also help to fuel the take up of forex trading across which might be termed the ‘amateur’ community – ordinary people who would once have felt locked out of markets like these, but who now take advantage of automation and accessibility to start to learn the ropes.
If the details offered above aren’t enough to convince of the resilience of London’s forex markets, consider the reaction of some of the biggest players in those markets. Banks such as Goldman Sachs, BNP Paribas, Citi, Deutsche Bank and UBS all have global forex heads based in London, and ING, a Dutch bank, opted for London as the city in which it wanted to centralize its forex trading operations.
The safest conclusion to be drawn from all of this is that while it’s still not possible to second guess exactly which parts of the UK economy will be negatively impacted by the reality of Brexit, it’s pretty safe to assume that dominance of global forex trading won’t be one of them.