Europe’s largest buy-side firms have come out in support of broker dark pools, but still crave more transparency on how orders are handled and greater clarity in classification of trading venues. Furthermore, investment managers have indicated they would prefer a more prescriptive approach by regulators to improve their overall visibility of equity market activity via post-trade data.
The Committee of European Securities Regulators (CESR), the body responsible for the coordination of securities regulation across Europe, received responses from more than 50 market participants and trade bodies to its consultation paper on reforms to MiFID in light of its impact to date on European secondary markets.
CESR issued three separate papers in April – the others were on transaction reporting and investor protection and intermediaries – and published responses on all on 8 June. All of the feedback will be summarised and presented to the European Commission by July for consideration as part of its mandatory review of MiFID.
In its paper, CESR proposed reclassifying broker-owned crossing networks and dark pools as MTFs when they reach a certain size and introducing a stricter reporting regime that includes adding an identifier in post-trade reports to reveal which broker system executed a trade. Currently, a number of broker pools are registered neither as multilateral trading facilities (MTF) nor systematic internalisers (SI) – the two new categories of trading venue introduced by MiFID – and this has led to calls for greater regulatory scrutiny from exchanges and MTFs.
Buy-side traders, however, are supportive of the role of broker dark pools within the current market structure.
In its response to CESR, the European Fund and Asset Management Association (EFAMA), which represents investment firms in 26 EU countries responsible for approximately €12 trillion in assets under management, said that crossing networks fulfil an important role by enabling its members to “minimise market impact and opportunity costs for large orders”. EFAMA’s members include Goldman Sachs Asset Management, Schroders, Franklin Templeton, Blackrock and HSBC Investments.
“Current transparency [for broker dark pools] is satisfactory and post-trade transparency is sufficient (transparency requirements should not be extended to pre-trade),” read EFAMA’s response to the CESR consultation paper on secondary markets.
Despite a recognition of the positive impact of broker crossing networks on execution performance, EFAMA, UK trade body the Investment Management Association (IMA) – whose members manage £3 trillion of assets – and global investment group Fidelity agreed that broker crossing networks should be categorised under MiFID. They also suggested that client flow crossed within broker dark pools should be identified separately from trades against brokers’ internal flow in post-trade reports.
The IMA welcomed the recent initiative by six brokers and trade reporting facility Markit BOAT to supply aggregate country-by-country execution data from their dark pools. But Guy Sears, director, wholesale at the IMA and author of its response to CESR, asserted that, “such publication should be mandatory and applied to all [broker crossing networks]” and that “the data should be published at the end of day identifying each [broker crossing network] separately”.
Buy-side institutions were also mostly in favour of greater intervention from CESR in the area of post-trade data consolidation.
“The hope of a market-led solution has not materialised so we believe it is time for regulation,” read Fidelity’s response. “The key benefits of a [mandated consolidated tape] would be easier price discovery, improved price and volume information for better execution and TCA (transaction cost analysis) data points. The lack of a consolidated tape makes it difficult for traders to get a complete picture of tradable liquidity across countries and trading venues.”
MiFID initially relied on the development of a market-led solution to aggregate post-trade data following the introduction of competition between trading venues in 2007. But while commercial solutions have emerged, these have been costly, partly due to the bundling of market data services by some exchanges, and many buy-side traders still find it difficult to build a complete, standardised picture of European liquidity, which can impair their ability to achieve best execution.
In its consultation paper, CESR proposed the creation of approved publication arrangements (APAs) to collect, clean and standardise data to enable easier and uniform consolidation. It also asked for market feedback on whether to compel APAs and trading venues to deliver data in a standardised format for free to a consolidator selected by tender.
EFAMA called for CESR to be given greater regulatory powers to set standards for post-trade data publication. Fidelity, EFAMA and IMA all agreed that the cost of real-time market data from domestic exchanges would have to be explored as part of the MiFID review.
“One of MiFID’s negative consequences has been a significant rise in data procurement costs for investment managers,” read EFAMA’s feedback. “Any revision of MiFID should aim at fostering price competition and cost reduction. EFAMA is in favour of requiring the unbundling of trade information to stimulate price competition.”