Decision on tightening of periodic auctions due in coming months as MiFID II loophole concerns linger

ESMA will publish its findings on periodic auctions in the coming months and will make a decision on whether to recommend changes to how they operate.

The head of the European markets watchdog has said a decision will soon be made on whether to tighten rules for periodic auctions, as concerns around their use to circumvent MiFID II requirements linger. 

Speaking at the World Federation of Exchanges General Assembly earlier this week, Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said that the regulator is due to publish its verdicts from a fact-finding exercise carried out on periodic auction systems over the coming months.

He told attendees at the event that since the application of MiFID II’s double volume caps (DVCs), which limits transactions that can be executed under waivers at 4% at a trading venue level and 8% for all EU trading venues, trading flow has migrated towards other venues such a periodic auctions.

“While the share of trading on those new periodic auction trading systems is still low, it can be seen that they are increasingly attracting trading flow. These developments have attracted our attention and triggered concerns that some periodic auction systems may be designed with the intention to circumvent the double volume cap regime,” Maijoor said.

In response to ESMA’s update, Rob Boardman, European CEO of equities broker ITG, said that it will be interesting to see what comes out of the regulator’s fact-finding exercise on periodic auctions.

“To date, periodic auction functionality is providing valuable execution quality – exhibiting very low toxicity of liquidity. Moving forward, we anticipate an even greater focus from our clients on sourcing high-quality liquidity, particularly in block size,” Boardman added.

European regulators and asset management firms have expressed concerns around the surge in volumes and the use of periodic auctions over the past year, with senior buy-siders recognising the need for regulatory tightening to curb broker-preferencing to help distinguish between addressable and non-addressable liquidity.

Major European exchange operators including the London Stock Exchange Group (LSEG) and Cboe Europe, have in the past claimed that pre-matched activity on auctions has been overstated, with LSEG’s Turquoise adding that broker priority allocations on its auction system could be as low as 0.06%.


Maijoor also said that ESMA is preparing for a ‘no-deal’ Brexit, stating that the importance of UK financial markets within the EU is demonstrated in secondary markets where around 40% of trading in equities issued in EU27 currently takes place on UK trading venues.

“In the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs (memorandum of understanding) that we have with a large number of third country regulators,” he said.

“These MOUs are essential to meet our regulatory objectives and allow information exchange for effective supervision and enforcement, for example for market abuse cases. ESMA has coordinated the preparations for such MOUs together with the EU27 NCAs”

Maijoor also stated that ESMA is striving to ensure continued access to UK central counterparty clearing houses (CCPs) once the UK leaves the European Union, proposing legislative changes under EMIR and a transitional provision. Failure to ensure continued access could see a situation where EU clearing members and EU trading venues remain uncertain about access to EMIR-recognised CCPs, Maijoor warned.

“A reciprocal recognition of equivalence appears to be the direction of travel,” said Ben Pott, head of government affairs at NEX Group, in response to Maijoor’s speech. “His suggestion would effectively mean the UK and EU agreeing to clearing house equivalence from day one as well as signing up to orderly withdrawal terms should one of the parties no longer want to maintain the equivalence decision.

“However, the scope of equivalence he is considering still appears too narrow and focuses predominantly on CCPs. Whilst helpful, a broader equivalence regime is needed as the current framework simply doesn’t work from a trading perspective. The suggestion for an EU-wide regime for third country trading venues is a step in the right direction but with March 2019 approaching it is unclear how quickly such a regime could become effective.”