While the future of dark pools, post-trade interoperability and organised trading facilities (OTFs) has been on everyone’s minds as the Markets in Financial Instrument Directive review (MiFID II) hits the trialogue phase, which of the more obscure issues are European regulators and politicians currently hammering out in Brussels?
Trading technology is seen as one the areas that has developed rapidly since the original MiFID was introduced, becoming both more complex and electronic trading techniques are also taking up a greater proportion of all trading activity.
In MiFID II, both algorithmic and high-frequency trading (HFT) are under the microscope and could be subject to curbs. Proposals include requiring any firms that deploy a trading algorithm to be licenced. While this would only have minimal impact on the buy- and sell-side, which are already registered with regulators, it would bring HFT firms within regulatory oversight, requiring them to adopt proper systems and controls.
There are also rules on the table that would require HFT firms to provide a certain amount of liquidity to markets, to prevent them rapidly moving in and out of markets.
Trading venues will need to implement tougher rules to prevent chaotic electronic trading. They will need controls against disorderly trading, erratic price movement and capacity overload. However, the most controversial proposal is for venues to implement order to trade ratios, which could be a major sticking point in trialogue discussions.
Most HFT firms have welcomed registration with their local regulator, though they might look less favourably on being required to offer liquidity in markets that have turned against them.
The European Commission is also keen to make markets work better for small and medium enterprises (SMEs). In the current low-volume market that Europe has been experiencing for some years, the bulk of flow is seen among top stocks, which are far more liquid than SME stocks.
To help increase trading in SMEs and provide more investment for these businesses, MiFID II proposes creating a new SME markets regime within the existing multilateral trading facility (MTF) framework. However, with a new definition of SME on the cards and some wondering whether this will really do anything to help SMEs, it is currently unclear whether these proposals will come to fruition in the final text.
Lastly, consolidating Europe’s trade data is a vast area of crucial importance to the industry, yet has received relatively little attention thus far. MiFID II hopes to ensure that data from across European trading venues is of both high quality and consistency, ensuring that investors are able to access accurate and meaningful data on European markets in order to better inform their trading decisions. The consolidated tape has long been a bugbear of European traders who are forced to aggregate disparate data sources, often with different methodologies and data fields, from across the continent in order to make an assessment of the market as a whole.
Of course, there are many other areas of MiFID II also vying for attention, including research provision and commission sharing, work to increase transparency in non-equity markets and the regulation of broker crossing networks. With just a few months left of the year, regulators better be on the case because, as MiFID’s text itself recognises, markets need stability and have undergone so many years of uncertainty. Participants will be looking for confirmation of how regulation is set to develop in the coming years.