The European Commission ought to consider whether multilateral trading facilities (MTFs) with large market shares should be allowed to pay rebates for passive order flow, according to Cees Vermaas, executive director of sales and relationship management for European cash markets at global exchange group NYSE Euronext.
Vermaas contends that MTFs offering maker rebates for all clients, which he terms ‘payment for order flow’, as opposed to offering discounts or free trading for passive executions, or limiting rebates to particular market segments, creates an uneven playing field between MTFs and incumbent exchanges, which are not permitted to do the same.
“If you become successful and you have volumes which are comparable to those of the incumbents or established platforms, we think this [offering maker rebates] is an issue for the European Commission, which should look at payment for order flow,” Vermaas told theTRADEnews.com. He added that rather than being part of the EC’s MiFID review, taking place throughout this year, the charging of passive rebates is a matter for Europe’s competition authorities.
On Wednesday, pan-European MTF, Chi-X Europe accounted for more 30% of trading in the UK’s FTSE 100 index, compared with the London Stock Exchange’s 53.42%. On a pan European basis, Chi-X Europe had a 15.6% market share, compared with the LSE’s 21.9% (including Borsa Italiana and Turquoise) Deutsche Börse’s 13.1% and NYSE Euronext’s 16.28%.
Vermaas argues that European Union competition law would preclude an incumbent exchange with a dominant market share, such as NYSE Euronext, from implementing a maker rebate scheme for all customers.
European Union competition law seeks to prevent firms in any industry with a “dominant position” abusing that position, for example by charging prices so low that it puts competitors out of business. The concept of dominant position can vary by market: In 2004, the European Commission forced UK airline British Airways, which then had a 38% share, to abolish a loyalty rebate granted to travel agents.
“While we are not considering it, if NYSE Euronext decided tomorrow that it wanted to offer payment for passive order flow we would immediately have an issue with the competition authorities because we have a dominant market position and this would be considered price-dumping,” Vermaas said. “Chi-X calls itself an exchange, but can offer payment for order flow. I would like to pose an open question about whether that should still be allowed under European competition law. Why can they do things that we are not able to do?”
The London Stock Exchange offered passive rebates between September 2008 and September 2009, but Vermaas argues this did not present a problem because they were not available to all LSE customers. The LSE’s rebates only took effect once a member was trading more than £2.5 billion a month on the exchange – passive trading was free below that level.
Vermaas believes there needs to be more clarity about what represents a dominant position in the trading venue space. “My question is: if you grow successfully, on what kind of level is the European Commission going to consider you as an established party with a substantial amount of market share and therefore that you fall under the competition rules?” he said.
Vermaas is keen to point out, however, that NYSE Euronext would not want to implement maker-taker pricing even if it felt able to do so. “We don’t think maker-taker pricing makes sense,” he said. “Our order book is deep, our flow is diverse and there is a high likelihood of execution on our book.”