Regulation

BCNs to face difficulties under MiFID II

The potential transparency obligations that could be imposed on Europe's broker crossing networks under MiFID II could cause some to cease operating altogether, according to new research by London-based consultancy GreySpark Partners.

Speaking at a London event held to discuss the research, “MiFID II: The Impact of the New European Regulations”, Frederic Ponzo, managing partner, GreySpark Partners, pointed out that broker crossing networks are likely to be formally categorised under a new organised trading facility (OTF) regime, making them subject to the same regulatory oversight and authorisation procedures as multilateral trading facilities (MTFs).

This would increase costs for market operators – in particular, transaction information for OTFs is likely to be required on an aggregated basis every trading day for the value and volume of all trades on the system. The added pre- and post-trade transparency requirements and the reporting of transaction data to trade repositories may tip the scales for some broker-operated venues, leading them to close down. Some brokers, such as UBS and Goldman Sachs, have already launched their own dark MTFs, separate from their existing crossing networks.

“A reduction in the number of broker crossing networks would not necessarily be a bad thing,” said Ponzo. “Fewer venues would mean concentration of liquidity – thus helping to resolve some of the difficulties fragmentation has caused market participants in recent years.”

Under MIFID, trading venues can be categorised as regulated markets, MTFs or systematic internalisers (SI). The SI regime was intended to capture firms that matched orders internally, but many brokers opted to register their internal crossing networks as over-the-counter services, which have less onerous trade reporting and execution constraints.

Ponzo also criticised the proposed imposition of measures designed to clamp down on high-frequency trading (HFT) activity – moves which he views as “populist” and not grounded in solid evidence. These proposals include limits on the ratio of orders to transactions, as well as defining HFT activity as a subset of a new automated trading regime.

“I would be disappointed if all the measures included in the MiFID review are actually implemented,” he said, adding that he expected that the public debate fuelled by the consultation and the responses to it may yet cause some of the HFT measures to be scaled down or dropped by the time of implementation.

The release of the revised MiFID II proposals by the European Commission has been delayed until October, from its original planned release in Q1 2011. Ponzo added that the delay may yet cause difficulties for the implementation stage of the directive, pointing out that it allowed approximately six months less time in which to ensure smooth implementation – a factor that would also likely increase the cost for market participants across the board.