How Switzerland’s dispute with the EU over stocks prepared it for the pandemic

An electronic display showing stock indices at the headquarters of the Swiss Stock Exchange (Boerse operated by the SIX group in Zurich.

FABRICE COFFRINI/AFP via Getty Images

The dispute between Switzerland and the EU which saw Swiss stocks delisted from European exchanges helped the country’s market weather the pandemic, SIX Swiss Exchange Head Christian Reuss has told CNBC.

The European Union allowed the recognized equivalence of the Swiss stock exchange to lapse in 2019 after a dispute over a host of bilateral treaties governing Switzerland’s political relationship with the bloc.

The EU grants “equivalence” to countries whose stock markets are deemed equivalent to those of its member states, and the end of the agreement meant EU shares could no longer be traded on Swiss exchanges.

European traders were subsequently banned from trading stock in hundreds of Swiss companies, a move which saw the Swiss stock exchange obtain “almost 100%” market share in equity trading, according to Reuss. In 2019, the SIX Swiss Exchange overtook Euronext Paris to become the third-largest primary exchange on the continent, behind only the London Stock Exchange and Germany’s Deutsche Boerse.

“That of course had some benefits to the market. When all the liquidity is pooled in one place, spreads remain stable, the available liquidity of course went up, and if everything is pooled there, you can trade bigger tickets,” Reuss said.

Trading efficiency also improved, with the SIX Swiss Exchange’s order-to-trade ratio decreasing, meaning trades were more likely to be executed.

“Another thing that is actually quite striking when you have all the liquidity pooled in one place, it becomes more resilient to volatility shocks, like we had in March with the Covid-induced volatility,” Reuss told CNBC via video call last Wednesday, adding that investors benefited from increased market resilience.

“What we saw was that our spreads widened as much as other markets, and they came back quicker, so that is probably something where you may say that concentration of liquidity helped.”

Swiss-UK equivalence reinstated after Brexit

With the U.K. having left the EU’s orbit on Jan. 1, a renewed equivalence arrangement between the U.K. and Switzerland saw Swiss shares resume trading on London exchanges last week, a development Reuss said “helps tremendously with competition.”

“There are two angles to this. Firstly, if liquidity is pooled in one place, for price formation it has tangible benefits,” he said.

“On the other hand, fragmentation also has its benefits because it brings in competition and that makes sure you stay close to your clients, that you develop innovative capabilities and compete.”

Alasdair Haynes, CEO of the London-based Aquis Exchange, told CNBC last week that the stock market equivalence agreement between the Swiss and British governments was crucial, adding that Jan. 4 saw a “massive overnight shift in liquidity” of shares from the 27 EU member states away from London.

“We saw 95% of the business literally move overnight, which is somewhat embarrassing for the U.K. but clearly is a great victory for the EU27,” Haynes said.

“What this is showing is that London and the United Kingdom has to do something very positive and constructive to maintain its position as a major financial center in Europe, and of course that means that we have to negotiate things with people like Switzerland, we need to get equivalence, and it does mean that London has to be incredibly innovative in order to maintain its position.”

How Switzerland’s dispute with the EU over stocks prepared it for the pandemic