France’s markets regulator has launched a broadside against off-exchange equities trading, saying it must be restricted to “complex transactions” that combine equities and derivatives.
The comments of Jean-Pierre Jouyet, chairman of the Autorité des Marchés Financiers, will fuel an already fractious debate over the role and size of over-the-counter (OTC) equities trading.
The UK and City of London is broadly sympathetic to OTC trading, believing that institutional investors need facilities like “dark pools” and other off-exchange mechanisms to get large orders done away from exchanges to avoid the risk that prices move against them.
However in France and other continental European market centres, there is scepticism over the role of such facilities, and much more support for traditional exchanges and other “lit” platforms.
Last week the City of London expressed concern after a poll of brokers and asset managers based in Europe showed some believed that rules allowing large blocks of trades to be done without prices displayed beforehand could undermine market transparency.
Mr Jouyet said that while the end of national exchange monopolies had “brought a welcome wind of competition”, new facilities that have emerged were “sometimes less transparent”.
He said that while estimates as to the size of OTC equities markets in Europe varied between 15 and 40 per cent, his agency believed the true figure was “at the upper end of that range”.
He added: “The most disturbing thing here is that we are not even capable of providing reliable figures, which says much about the task that awaits us.”
OTC trading should “remain the exception” because only the “ordered, transparent bringing together of the greatest number of buyer and seller interests” would guarantee fairness for all market players and “formation of the right price”.
“The volume of OTC trades must therefore be reduced and execution of share transactions in transparent, organised multilateral facilities encouraged.
“This [OTC] form of trading must be reserved for clearly identified types of transactions which are not supposed to contribute to price formation, such as complex transactions combining cash and derivatives,” Mr Jouyet told the annual meeting of the International Capital Markets Institute in Paris.
He added that were “far too many” exemptions to the principle of pre-trade price transparency – a reference to waivers granted to dark pools and other off-exchange venues under the Markets in Financial Instruments Directive (Mifid), which allows them not to have to display prices before trades are done.
Mr Jouyet said: “All the exemptions therefore need to be scrutinised and only those that are fully justified should be accepted. The regulator also needs to have access to all the order books in order to be able to detect price manipulations in the future.
“This is the approach that has been adopted in the United States with the ‘consolidated audit trail’ project. I urge Europe to follow the same path.”
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