Crossing Networks & Dark Pools

London must brace for MiFID II-driven BCN and sales trader decline

The impending MiFID II regulation will effectively cease broker crossing networks in Europe, causing unprecedented upheaval to trading processes and the technology that underpins them, an expert has warned.

The mixing of proprietary order book and customer orders will be banned in MiFID II, which will be a massive change for the City of London, as the trading processes are further automated and trading is directed to exchanges or exchange-like platforms, Bob Fuller, chief administration officer of technology provider Fixnetix.

"There is going to be no broker crossing networks. The mixing of prop capital with customer flow is not allowed unless you offer two-way prices," he said, adding that crossing networks would have to become systematic internalisers.

A former CEO of pan-European trading venue Equiduct, Fuller said although details of MiFID II were not yet finalised and will be subject to negotiation between the European Parliament and Council of the European Union through the trialogue stage, the broad themes were largely set.

"This is going to be a huge change for London. The European Commission wants trading on exchanges with two-way prices and it doesn't look favourably on voice trading, so I don't think that will survive beyond 2017 – it will disappear remarkably quickly," Fuller said. 

Speaking at an industry event 'The EU Regulation Exocet' hosted by Fixnetix and a small group of market participants, Fuller was joined by the UK's lead policy advisor on EU financial services legislation, Dr David P. Doyle.

Doyle warned of further delays to the MiFID II legislative process in part due to a recent shift in focus in Brussels to strengthen banks in the wake of bank crises, such as occurred in Cyprus.

Brussels has pushed through legislation to widen powers of the European Central Bank (ECB), which will become a single supervisory entity for EU banks, including those in the UK.

Doyle predicted MiFID II would likely come into force in 2016.

At present, the Council is preparing its final position on MiFID II, after which it will engage with the Parliament with input from the Commission, in the trialogues. Experts have suggested this may begin as early as September but may last around nine months.

Debate around pre-trade transparency, and specifically, which waivers should be available to dark pool operators, has divided Council members. In its initial draft, the Commission wants only the large in scale waver, which permits only larger trades to be executed off exchange. But the Council has debated whether to include the reference price waiver, used by dark pools to execute trades at the mid-point of the best quoted bid as sourced from a reliable reference market.

Richard Henderson +1 212 217 6916 richard.henderson@information-partners.com