Tightening dark trading rules, democratising capital markets top MiFID II review focus

On the 06/03/21 at 7:59AM


Tuba Raqshan

Reporting data of over the counter (OTC) and Systematic Internalisers (SI) trades, creation of a consolidation tape and bolstering retail investor protection will be the key priorities for the ongoing MiFIR/ MiFID II review.

While MiFIR/ MiFID II application in 2018 has fostered competition in the European capital markets, it has also led to the rise of alternative trading venues and systematic internalisers (SIs). Retail investment participation has dropped drastically, stressing upon the need for a democratic access to capital markets. This is one of the focus areas of the ongoing MiFIR/ MiFID II review.

Mairead McGuinness, commissioner for financial services, said that all investors must have a comprehensive view of the pricing data, which is currently fragmented across Europe. “The increase in competition has resulted in increased fragmentation. Therefore, we need to create a consolidated picture of liquidity through the consolidated tape. Instead of separate data feeds, there will be one data feed everywhere in the EU. This will be a valuable comparison tool. Trading in the dark has to be reported to the CT and dark traders will have to pay a fee. We need to ensure smaller investors get the same level of prices and liquidity,” added McGuinness at the annual convention of the Federation of European Securities Exchanges (FESE).

Creating market data transparency:

The hyper competitive market has made it increasingly difficult for retail investors to get best execution. Tilman Lueder, head of securities markets unit in DG FISMA, said that his team has identified three areas to tackle in the MiFID II reform. “First is the information symmetry problem, as not everyone sees all parts of the markets. Second is the surge costs for investors, who find it hard to navigate through this sector. Third, best execution practices – if you do not see the market, you do not know if you have received good prices. We need to show retail investors that their brokers got the best deal for them. That is the idea behind the consolidated tape, to show everyone where the best execution is available throughout the day, where the tightest spreads are and where the deepest pool of liquidity is,” he said, adding that MiFIR review will focus on getting more retail investors to participate in capital markets and attract international investments and listings.

The strong share of passive investing and trading that occurs at closing auctions are factors for fragility for price formation process, said Stephane Giordano, president of Association française des marchés financiers (Amafi). Lueder stressed that there is not enough activity through the day, which is concerning. “It is difficult to navigate through the day to find best prices or pockets of liquidity. That is why an intra-date tape is important. Retail investors and smaller asset managers need to see this, to hold financial intermediaries and brokers accountable for best execution,” he said. The consolidated tape is not just for blue chips’ prices but will also help make regional exchanges more visible and accessible, added Lueder.

Tackling increased dark trading volumes:

MiFIR/ MiFID II review is an opportunity to remedy some of the shortcomings, such as the increase in OTC and SI trading, said Markus Ferber, member of the European Parliament, ECON Committee. He added that these trades do not have a price formation process and contrary to the intention of the legislators, share of price forming lit trading activity has reduced. While the idea of the consolidated tape could be a useful supervisory tool and a good instrument to check best execution, it is as good as the data fed into it, said Ferber. “Data coming from venues other than regulated markets is questionable. Ensuring that venues’ data qualities to a certain quality is a sensible first step,” he explained.

Before entering the process of the creation of a consolidated tape, which will divert resources, efforts and time of the European Commission, there are urgent problems to fix, said Guillaume Prache, managing director of retail investor association Better Finance. “The first problem is the expansion of the SI and OTC trades. Since 2015, we have been asking that SIs and dark venues be prohibited from dealing with retail trades unless they are on par with lit venues on pre- and post-trade transparency. There is a lack of easy access to market data, especially details such as payment for order flows, which smells like inducements and conflicts of interest. It must be fixed in MiFIR review,” he said.

Bolstering investor protection laws:

Investor protection rules are sector-specific, differing from one instrument to another, which is confusing for retail investors, said McGuinness. She added that the Commission is working to ensure that these laws are consistent and is examining rules on inducements and disclosures. Pointing out that current financial advice is biased due to this conflict of interest, McGuinness added, “We are planning to introduce rules around inducements and look at the quality of financial advice. There could be an EU quality label for financial advisers and maybe a certification too,” she added.

Prache said that if the consolidated tape is the Commission’s priority, it should start with the bond market, which is worse in terms of transparency. “Retail investors have been kicked out of the bond market. If there is a CT, it should be governed by independent EU authorities and not the financial markets,” he added.

Realities of consolidated tape:

Giordano said that it should be mandatory for trading venues to provide data to the consolidated tape free of charge. “To pay for the tape, there should be a mandatory subscription to the CT by financial intermediaries and members and a low-cost option for retail investors. It should be governed by ESMA but should be run by those who have the technical skills,” he added. Beatriz Alonso-Majagranzas, head of equity and market data, BME Group, stressed that EU securities regulator, European Securities and Markets Authority (ESMA) should be in charge of enforcement and governance as a neutral body on the functioning of the tape.

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