The majority of European buy-side traders are not confident MiFID II will improve the quality of markets and they would welcome further consolidation among European trading venues.
A survey on dark pools and European regulation by agency broker CA Cheuvreux revealed many buy-side firms had negative views of market microstructure, with only 26% holding the view that measures included in MiFID II would lead to an improvement.
Rules included in MiFID II contain the introduction of a harmonised tick size regime across European trading venues, a ban of maker-taker pricing, a new framework for broker’s internal crossing networks – which currently operate under the guise of OTC trading – and a number of high-frequency trading curbs.
Around 78% of respondents believed maker-taker pricing structures created conflicts of interest, with the same percentage in favour of regulation on tick sizes. Moreover, 73% believed there needed to be more research into the types of OTC equity trades conducted and only 30% were in favour of imposing exchange-like regulation on dark pools.
Furthermore, 68% of those questioned thought the ideal number of European trading platforms was less than five – far less than the number of domestic exchanges in the region.
Looking at dark pool trading practices, half of those surveyed said they asked for flow not to be directed to specific dark pools and 73% said their reasons for using non-displayed venues did not include market volatility.
"The major unintended consequence of MiFID was widespread fragmentation and the explosion of high-frequency trading. What is now certain is that client business represents a much smaller percentage of market turnover than it did five years ago with, in some markets less than 20% of primary order book volume in main index names being institutional investor flow," said Ian Peacock, global head of execution services at CA Cheuvreux. "With the MiFID II review currently underway, dark pools are one of the major topics under scrutiny. Institutions are concerned about the complexity of this new trading landscape and do not feel the proposed regulatory changes will address or help to solve their concerns."
The agency broker polled 50 representatives from buy-side trading firms representing a broad range of assets under management.
CA Cheuvreux is currently the subject of a takeover bid from Kepler Capital Markets in a deal which would create an equity broker focused on continental Europe with sector and country research covering 650 stocks. A spokesperson for CA Cheuvreux said the deal was on track to be completed in mid-February.