A senior European Commission official on Monday played down expectations among traders, exchanges and asset managers of a sweeping overhaul of the Markets in Financial Instruments Directive (Mifid), saying a review of the rules that injected competition into European share trading were not designed to ”create a Mifid II”.
Brussels has embarked on an examination of the impact of Mifid on competition in share trading, and of whether a related ”code of conduct” brokered with the post-trade industry has had the desired effect of lowering clearing costs.
Mifid broke the monopolies of exchanges in Europe when it came into force in 2007, allowing the emergence of competitors like Chi-X, Turquoise and BATS Europe. But it also allowed a proliferation of ”dark pools” of various kinds, with Europe now home to multiple different platforms where trades can be done.
Many market participants complain that the market is now too fragmented, making it hard to know where the best prices are available. Making matters worse, Europe – unlike the US – has no unified system for price reporting in a so-called ”consolidated tape”, meaning it is hard to know whether the best deals are being achieved on behalf of the investing public.
Critics of Mifid say its original aim of spurring competition is less relevant in a post-financial crisis world where the emphasis has switched to ensuring market integrity and that market structures are solid enough to withstand future shocks.
Maria Velentza, head of the securities markets unit at the Commission’s internal market and services division, said that Brussels was getting a lot of feedback on such issues that would be taken into account during the review. However, she added: ”We don’t have the intention to create a Mifid II. We want to stick with the objectives that we had in 2004 [when Mifid was first formulated] which are still valid.”
She said those as increasing competition, raising trading volumes and lowering transaction prices. ”The same objectives are still valid,” she told the TradeTech Liquidity 2009 conference in London.
Ms Velentza said that as part of feedback for the Mifid review, Brussels had been told by exchanges that they were unhappy with an ”unlevel playing field” between exchanges and so-called ”crossing networks” – or dark pools – operated by banks.
The Federation of European Securities Exchanges is locked in a war of words with banks – such as Goldman Sachs, Morgan Stanley and Credit Suisse – over whether such crossing networks operate with the same regulatory oversight as exchange-owned dark pools. The banks reject FESE’s suggestion that up to 40 per cent of European equities volume takes place ”over-the-counter” on such platforms, saying it is closer to 2 per cent.
The Committee of European Securities Regulators this month sent banks a questionnaire as part of a study designed to establish the extent of trading in various types of dark pools.
Asked if this would form part of the Mifid review, Ms Velentza said: ”Whatever we end up with very much depends on these findings by CESR.” She said there was no agreement between FESE and the banks on how to define dark pool activity, with a ”big problem of definitions and terminology used”.
”I hope we will get a clear picture,” she said. However she said Brussels would ”look at the function of crossing networks” and whether ”we need transparency with them or not”.
”The work that they [the CESR] do will form the basis of what we do,” Ms Velentza said.