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Report: the problem with European stock markets

March 2021 • The future of EU capital marketsby William Wright & Eivind Friis Hamre

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At a time when the European economy needs bigger and better equity markets more than ever to help support a post-Covid recovery, this short paper analyses of one of the biggest barriers to growth: the complex patchwork of European stock markets, stock exchanges and post-trade infrastructure.

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‘The problem with European stock markets’ paints a stark picture of the Kafka-esque complexity of European markets. Across Europe, we identified 22 different stock exchange groups operating 35 different exchange for listings, 41 exchanges for trading, and nearly 40 different CCPs and CSDs.

The genesis of this paper came from two simple questions:

  • First, can we draw a diagram of the structure of European equity markets on one page? (it turns out that after 23 attempts the answer is ‘yes’)
  • And second, what would the US stock market look like if every state has its own stock exchange? (the answer: remarkably like stock markets in Europe).

The paper argues that this complexity is one of the main reasons why European equity markets are under-developed, shrinking, and punching below their weight on the global stage – and that until this ‘elephant in the room’ is addressed we are unlikely to see substantive progress. It paints an optimistic and ambitious vision of what European markets might look like in future and outlines some proposals (some more radical than others) to help us get there.

> The elephant in the room

The complex patchwork of European equity markets is a huge obstacle to building bigger and better capital markets at a time when the European economy needs them more than ever. We can tinker at the edges with the detail of regulation, but so as long as Europe has 22 different stock exchange groups operating 35 different exchange for listings, 41 exchanges for trading, and nearly 40 different CCPs and CSDs, not much will change.

> Punching below its weight

The European equity market is less than half the size of the US but has three times as many exchange groups; more than 10 times as many exchanges for listings; more than twice as many exchanges for trading; and roughly 20 times as many post-trade infrastructure providers. This complexity may help explain why Europe has smaller and less developed stock markets than its global peers; why the number of listed companies is falling (down 17% over the past decade); and why Europe and the EU’s share of global stock market and IPO activity is well below their share of GDP.

> Why should we care?

Large and efficient stock markets can be a virtuous circle, generating more IPO activity and more liquidity. Small stock markets – and 18 out of 33 stock markets in Europe have a combined value of less than €100bn – can descend into a vicious circle. Our research shows a clear correlation between the size of a market and its depth, level of IPO activity, and liquidity.

> Some sensible solutions

Europe should keep chipping away at making it easier for companies to go public, easier for investors to invest in them, and easier for intermediaries to trade them. Individual countries can make equity more attractive by addressing the tax differential with debt funding and rethinking capital gains tax. Stock exchanges could also be nudged and encouraged to consolidate – our research shows small exchanges that are part of wider groups perform better than standalone exchanges.

> Some more radical suggestions

Consolidation needs to go a step further and filter down from merging exchange groups, to creating genuine single markets with the same rulebook within those groups. We need more competition between stock exchanges where it really matters and less competition where it doesn’t. Imagine a world with four or five large groups of exchanges in Europe operating four or five large, deep, competing single markets within those groups. Every listed company in Europe would make a free and active decision over which of these exchange groups to choose for its listing. Every stock listed on any of the groups would be was tradeable on every market in every group. And all of this would feed in to three or four open access CCPs and CSDs that supported any and all exchange groups on the same terms.

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