Trying to work out what politicians in the European Parliament think about “dark pools”, high-frequency trading and the like has been a bit of a guessing game.
But we now have a tantalising glimpse of leg.
It comes not a moment too soon, since the Committee of European Securities Regulators in Paris is busy working on its review of Mifid.
With public feeling against short-selling running high in Germany, and general mistrust of market structures engendered by the “flash crash” in the US, the missing link has been what MEPs think.
They, after all, will ultimately decide how the region’s market structures will – and will not – be re-regulated to take account of sweeping technological change, competition, and the advent of fragmentation.
Kay Swinburne, rapporteur to the Economic and Monetary Affairs committee of the Parliament, has produced a draft report on how she thinks the new paradigm should look. Very little is left untouched.
To pick out the most interesting nuggets:
• She suggests it may be necessary for “informal market makers” – read: HFTs – to be subject to mandatory liquidity provisions;
• Calls for an “ongoing regulatory review” of the algorithms used by HFTs;
• Seeks an examination of HFT to determine whether market flow generated automatically is providing “real liquidity” to the market and what the effect of this is on overall price discovery;
• Suggests that, “in the interests of equitable treatment”, rules need to be introduced so that MTFs (multilateral trading facilities”, like Chi-X Europe) are subject to the same level of supervision as exchanges, under certain circumstances;
• Calls for new provisions under Mifid for “broker crossing networks”, including requirements that they submit to authorities “orders matched in the system”, and “details on access to the system”; and
• Suggests a minimum order size for dark pools.
This is all juicy stuff. If it were all to become law it would mark quite a substantial tightening of the rules around Mifid. Of course Ms Swinburne’s recommendations have yet to be looked at and possibly amended by other rapporteurs, who could revise it before it becomes the committee’s final report to the European Parliament. But it does reveal quite a bit about how some politicians may be heading.
Take the suggestion that MTFs be regulated the same way as exchanges. This will be music to the ears of the London Stock Exchange and NYSE Euronext which have been making noises about an alleged unlevel playing field between regulated markets and MTFs (as if they both perform the same functions).
Broker crossing networks will be squirming at the idea that they be forced to convert into MTFs if they cross a certain volume threshold. But at least some of them have been anticipating moves like this and are reacting – Nomura, with its NX platform, for instance.
This is the point. The cash equities people should be taking a leaf out of their colleagues in the OTC [over-the-counter] derivatives and clearing world. There, big changes were clearly coming down the pipeline long before a legislative shot was fired.
You would have to have been living under a rock not to see that regulators would be forcing more derivatives onto exchanges and “swap execution facilities”, and that post-trade services – like clearing and trade reporting – were going to be The Next Big Thing in market structures. That’s why Icap, the inter-dealer broker, moved very early to push deeper into OTC post-trade; Tullett Prebon and others are now catching up.
Those affected by changes to Mifid, which Ms Swinburne signals will go far beyond the narrow confines of Mifid itself, should be thinking on their feet, anticipating some significant tightening of regulation around European equity market structures.
It is worth remembering, as EU policy adviser David Doyle pointed out at a conference at the LSE last week, that the whole review of Mifid will have as its driving principle investor protection – that is, the interest of the retail investor, not the operators of exchanges, dark pools and HFTs. Europe was lucky to escape a “flash crash” of its own, but that doesn’t mean that European politicians weren’t reading reports about the whole fiasco and its effect on US investor trust in market structures, which has been badly wounded.
I doubt that this has yet sunk in on the trading desks of London. It needs to.
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