BCNs face omission from OTF regime

The European Parliament is strongly considering scaling back MiFID II proposals to include broker crossing networks in a new trading venue category, due to fears of increased fragmentation.

The European Parliament is strongly considering scaling back MiFID II proposals to include broker crossing networks in a new trading venue category, due to fears of increased fragmentation.

This could mean that broker-operated dark pools will be forced to become systematic internalises (SIs) or multilateral trading facilities (MTFs). Speaking to after the Parliament’s latest meeting on MiFID II on Monday, Markus Ferber MEP said there was “strong support” from other legislators to limit the organised trading facility (OTF) category to non-equity instruments only.

Ferber, the rapporteur for the Parliament’s Economic and Monetary Affairs Committee (ECON) reading of MiFID, will play a key role in guiding the revised directive through the European Parliament.

“I asked during the meeting whether we really need a new trading venue category at all, given that the likely result is more fragmentation and a less efficient price discovery process,” said Ferber. “However, we do need to be mindful of the new trading venues required for OTC derivatives, so one proposal we will discuss is making OTFs available for non-equities only.”

Ferber added that the Parliament’s goal was not to reduce the volume of equity trading done over-the-counter, but to impose greater transparency on this type of activity, possibly by stronger enforcement of MiFID’s existing trading venue categories.

“Broker crossing networks that offer services similar to trading venues could fall under the SI regime,” he said.

SIs are defined under MiFID as venues operated by investment firms that deal on their own account on an organised, frequent and systemic basis. Under MiFID II, SIs will be required to provide firm two-sided quotes above the equivalent of 10% of standard market size.

MTFs typically offer continuous trading via a centralised order book and must be accessible by all market participants. One benefit of BCNs often cited by buy-side firms is the ability of their operators to execute orders on a discretionary basis.

In MiFID II proposals presented last October, the European Commission proposed the OTF category as a way of capturing trading conducted in brokers’ internal crossing platforms, which are currently unclassified under the current version of the directive. OTFs would also cover trading in fixed income and derivatives instruments – asset classes that will now be captured by MiFID II.

Controlling HFT 

The 13 February meeting, which reviewed over 4,000 pages of responses to a questionnaire issued by Ferber in November 2011, also considered high-frequency trading (HFT), with Ferber arguing that the EC proposals did not go far enough to monitor HFT.

In its October draft of MiFID II, the Commission said it wanted to ensure all HFT firms comply with MiFID. The Commission also wanted to impose safeguards on brokers that offer direct market access and install risk controls at trading venues to mitigate disorderly trading, and to ensure platform resilience. The new MiFID rules will also be complemented by a new set of guidelines from regional securities watchdog the European Securities and Markets Authority, which will create a comprehensive regime for the operation of electronic systems by trading venues and direct market participants for the trading of all financial instruments defined under the directive. The ESMA guidelines are scheduled to be implemented by 1 May.

Ferber added that an EC proposal to impose market-making obligations on all users of algorithms would be discussed at a later date, but he emphasised that algo and high-frequency trading must “serve the real economy”.

Ferber is scheduled to present amendments based on feedback from the meeting and responses to his questionnaire to fellow MEPs before the end of April.