Improving post-trade transparency should top European regulators’ agendas to ensure that surveillance of trading activity is developed in line with the fragmented market structure, according to a new study from consultancy firm Market Structure Partners.
The report, ‘Myths and Realities of Equity Trading in Europe’, authored by Niki Beattie, managing director of Market Structure Partners and an ex-Merrill Lynch managing director, recommends greater information-sharing across multiple trading venues to tackle market abuse and calls for the costs of market surveillance to be shared between market participants. It also insists that an efficient clearing model for Europe is crucial to realising the goals of MiFID, but adds that the current review of the directive by the European Commission and Committee of European Securities Regulators should not seek to limit innovation or restrict the application of new technology, particularly in the high-frequency space.
“We need to stop being swayed by alarmist rhetoric in the market and start focusing on the fundamental issues such as the ability to fully reconstruct the market in a post-trade environment,” said Beattie. “This urgently needs to be fixed, not because it is a nice to have for the market but because it is an imperative for the regulators. The ability to reconstruct the market activity across multiple platforms is critical as demonstrated by the so-called “Flash Crash” in the US [on 6 May].”
On 6 May, the Dow Jones Industrial Average fell by 9.16% for a brief period in afternoon trading, before recovering to finish 3.2% down on the previous day’s close. Despite investigations by the Securities and Exchange Commission and leading US exchanges, the precise cause of the crash remains unclear.
The study asserts that the creation of a reporting system that can be applied consistently across the continent is one of the major challenges in achieving better post-trade transparency in Europe, “rather than a restrictive framework driven by vested interests that prevents critical sharing and standardising of information and improvements in the overall infrastructure.”
The report also identifies some of the biggest misperceptions that currently cloud the post-MiFID equity markets in Europe.
According to Beattie’s report, high-frequency trading is not damaging to institutional and retail investment firms, but supplies important liquidity to the market. This type of liquidity provision is an important pre-requisite for any market in which participants are not prepared to trade patiently and wait for the other side of their trade, the study explains.
The paper also argued that the current volume of trading conducted via over-the-counter (OTC) channels, widely considered to be around 40% of the total, is not unusual by historical standards.
“The problem is because [the level of OTC trading] was not properly measured in many countries pre 2007, they did not account for it in how they envisaged the post MiFID environment which is rather like drawing a map of the world and ignoring one of the continents,” the report observed.
Furthermore, the report notes that despite the arrival of new pan-European central counterparties (CCPs) such as EuroCCP and EMCF, competitive clearing in Europe is not yet a reality because of a lack of enthusiasm by rival CCPs to achieve interoperability.
“Because of the lack of interoperability in Europe, the new clearing houses are starting to behave like the old incumbents and perpetuating the same behaviour where they leverage their dominant position,” said Beattie. “We will never achieve the goals of MiFID if we don’t fix the underlying infrastructure.”