A pre-summer start to trialogues will result in a completed MiFID II text by year’s end, but buy-side concerns about dark pools remain.
Markus Ferber MEP, the lead rapporteur for MiFID II, told theTRADEnews.com trialogues were set to begin before MEPs five-week summer break from 22 July, while the Council’s final position will be formally set on Friday.
The Council last week breached an impasse on rules affecting dark trading, details on the new organised trading facility (OTF) venue category and access rules for central counterparties and trading venues.
“After having finally come to a general approach, we expect further negotiations with the Council and the Commission to start before the summer break,” he said. “Pushing some critical points in the beginning of the negotiation process, we expect the trialogues to be concluded by the end of the year.”
The Council last week agreed volume caps for use of the reference price waiver, which permits execution in dark pools using prices formed in lit venues. A 4% volume cap of total trading in a specific security for one trading venue, and 8% across all venues was agreed, beyond which the waiver will not be used, sending volume onto lit markets. The Council also agreed the new organised trading facility (OTF) venue should include equities, and open access rules for clearing houses and markets.
Dark concerns
The Council’s position will increase policing of dark trading, which buy-side firms have claimed will unfairly restrict dark pool use, resulting in poor execution quality and higher trading costs borne by end-investors.
“The Council’s current position will damage the institutional marketplace because while the market still retains the large in scale waiver, the volume caps for dark trading effectively forces business on to lit exchanges full of high-frequency traders,” Adrian Fitzpatrick, head of investment dealing for UK asset manager Kames Capital, told theTRADEnews.com.
Fitzpatrick fears the lobbying ability of exchanges, a perception they have a critical role in price formation and concerns dark trading is not transparent, have led regulators to craft rules sending trading volume back onto lit venues. This, in turn, will benefit exchanges and the increasing portion of high-frequency trading (HFT) firms active on those venues.
“HFT provides liquidity but no depth, institutional orders are far greater than market size and HFT systems are so efficient they get in front of buy-side orders or can change the offer before its captured,” Fitzpatrick said.
Ferber, however, contends that dark pools such as broker crossing networks need greater supervision, and the proposed volume caps for use of the reference price waiver (which is critical in allowing execution in dark pools) and the development of OTFs will lead to an improved trading environment for all participants.
“Both measures aim at limiting trading taking place in non-transparent markets. This will make the volume of trades taking place more visible and transparent thus enabling investors to detect a credible price signal,” he said.
“Institutional investors will have it easier to find proper prices in more transparent markets enabling a more efficient allocation of scarce resources.”
Ferber did not speculate on which element of MiFID II will attract greatest debate between the Parliament and Council.
Time for change
Jane Lowe, director of markets for UK buy-side trade body the Investment Management Association (IMA) said despite the Council’s position posing difficulties for asset managers, negotiations during the trialogue stage may form more positive outcomes.
“Although the Council text is not absolutely ideal for institutional investors, as it could leave them exposed to predatory trading practices, there is still time to improve things in the final version of MiFID II without compromising the policy objectives of regulators,” she said.
Lowe added that Parliament’s proposed restrictions on HFT, such as a 500 millisecond resting time, order-to-trade ratios and a ban on maker-taker pricing, may not achieve the desired results.
“We had hoped that MiFID II would have focused more on the needs of institutional and other investors, but it has in many respects focused again on issues between banks and exchanges – such as reducing dark pool flows – to the detriment of investors,” she said.
After the trialogue stage, the European Securities and Markets Authority will draw up technical standards based on the rules, which will then come into force. Implementation is expected during 2015 at the earliest.