The Committee of European Securities Regulators (CESR) has clarified its role in the regulation of dark pools and has acknowledged the need for a European best bid and offer (EBBO) benchmark for the first time.
In guidance released last week, CESR, whose job is to ensure supervisory convergence for securities regulation across Europe, said that national regulators could refer to them decisions about the use of pre-trade data publication waivers by non-displayed trading venues.
Previously, national regulators were permitted to interpret MiFID’s rules on use of waivers themselves. Following a consultation exercise, which ended on 21 January, CESR announced it would take a greater role in dark pool supervision but reiterated that the final decision on waivers would lie with the national competent authorities.
Under MiFID, trading venues that wish to offer non-displayed trading are required to adhere to one of four waivers to bypass the publication of pre-trade data and thus retain their anonymity.
The reference price waiver, which stipulates that quotes must be determined by a “reliable and widely published source”, typically a primary market, has come under criticism given its inability to accurately reflect liquidity fragmentation post-MiFID. But the new guidance from CESR explicitly permits dark pools using the reference price waiver to execute orders at the mid-point, best bid or best offer of an EBBO.
A number of trading venues have expressed interest in using an EBBO benchmark including Chi-Delta, the dark pool launched by Chi-X Europe yesterday, and NEURO Dark, Nasdaq OMX Europe’s non-displayed venue.
Despite the regulator’s acknowledgement of the need for a consolidated Europe-wide point of reference, some dark pool operators say this is only the first step.
“I welcome CESR’s guidance and appreciate the efforts that are being made but there isn’t an EBBO that I feel confident enough about to say to clients ‘I use this EBBO because…’,” Chris Smith, CEO of dark pool NYFIX Euro Millennium told theTRADEnews.com. “There is not enough standardisation around the EBBO yet for me to switch Euro Millennium over to using an EBBO as a reference price. Obviously as one emerges or the industry begins to coalesce around one then we would of course use it.”
Following prolonged discussions with UK regulator the Financial Services Authority, Euro Millennium adapted its matching algorithm from 14 April to match orders at the mid-point of the reference market it uses. Previously, Euro Millennium offered matching at or within the best bid and offer of the primary exchange.
CESR’s guidance notes that the EBBO should be created from the primary and other “sufficiently liquid (e.g. in terms of market share for a particular share)” regulated markets and multilateral trading facilities. However, it does not make clear how the formation of an EBBO would account for the number of venues on which different stocks trade.
“Does that mean that should I create an EBBO for Vodafone, I should take feeds from the LSE, Chi-X, BATS and Turquoise, but when I am trading a small cap stock I should only use the LSE and Chi-X?” asks Smith.