Buy-side positive on MiFID reforms – The TRADE Poll

Institutional investors are optimistic that MiFID II will improve transparency in Europe's equities markets, according to the March poll on
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Institutional investors are optimistic that MiFID II will improve transparency in Europe's equities markets, according to the March poll on

Asked whether MiFID II would give the buy-side adequate visibility of market activity, more than two-thirds (69%) answered positively. Opinions on the value of dark liquidity compared to price formation and on preference of dark venues saw an even split from respondents.

The poll is the first part of The TRADE Debates on dark trading, a series of research-led activities and events conducted in association with Bank of America Merrill Lynch. The poll's findings will be followed up with further research, analysis and debate throughout Q2 2011.

“The results suggest general optimism that MiFID II will bring greater market transparency, but little consensus on a range of topics affecting this space,” says Brian Schwieger, managing director, Execution Services, at Bank of America Merrill Lynch. “This is perhaps not surprising as post-trade transparency has attracted the most publicity, and it is also perhaps the topic on which the buy-side has been most united.”

The European Commission (EC) has attempted to address the difficulties of aggregating price data, tracking trades and finding liquidity in its review of MiFID. Among other proposals, MiFID II, the legislation due to be unveiled by EC in mid-May, will introduce the concept of authorised publication agreements to ensure standardisation of post-trade data across Europe's many equities trading venues so that it can be easily published over one or more consolidated tapes.

While respondents seem largely encouraged on the prospects for greater transparency, the buy-side's view on whether access to dark liquidity is more important than price formation was less definitive. In November, MEPs supported the argument that trading in non-displayed venues damaged price formation and voted to impose an order size limit upon dark pools.

Anecdotal evidence suggests that most buy-side traders find dark pools a useful means of avoiding market impact, but some also point out that the multiplicity of different venues makes liquidity harder to find, forcing them to break orders up into smaller parts across multiple venues. As such, any order size limit would reduce their ability to trade effectively in the dark.

The poll also suggested no clear preference among buy-side traders for using broker crossing networks (BCNs) compared with dark pools operated by multilateral trading facilities. While many trading desks at institutional investment firms report achieving significant price improvement in BCNs, traders appear to have few qualms about their potential change of regulatory status – if controls allow them to select the order flow with which they interact.