The European Commission (EC) has ruled out resolving a disagreement between dark pool operators and exchanges on reference price data in MiFID II.
Brokers had called for EC intervention in the dispute, which arose after Swiss exchange, clearing and data provider SIX Group attempted to raise the price of using its data for multilateral trading purposes. But the EC has said it will not include the matter in its current review of MiFID, leaving it in the hands of securities markets regulators.
“I feel very strongly that there is no point having a distinct and separate discussion, potentially with a distinct and separate outcome for Switzerland compared to the rest of Europe,” said Andrew Bowley, head of electronic trading product management at broker Nomura, adding that the MiFID review process is the right forum for the debate. “I really feel that, notwithstanding the fact that Switzerland is not part of the European Union, the Swiss exchange needs to be tied into that discussion. Is the EC thinking at this level of detail and at this level of nuance? Probably not right now.”
The EC confirmed its position in a statement, saying, “This issue is not at the core of the MiFID review and given that it’s technical and evolving, it would seem more appropriate for supervisors to deal with it through common standards.”
Under MiFID, dark pools can only execute trades at the mid-point, bid or offer of a European best or bid offer (EBBO) source that includes or is solely based on pricing data from the primary market. Specifically, pre-trade transparency waivers require dark pools to cross at a price determined “in accordance with a reference price generated by another system, where that reference price is widely published and is regarded generally by market participants as a reliable reference price”.
The Committee of European Securities Regulators, the body responsible for pan-European regulatory harmonisation, has published five reference price waivers and each of these waivers cites the primary market as being a source of reference data that can be used.
In April 2010, SIX Group proposed the creation of a new pricing model for firms that used its data for multilateral trading, doubling the fees that were charged for bilateral market usage. But a number of trading venues and brokers that operate dark pools objected. At least one, multilateral trading facility (MTF) Chi-X Europe, approached the UK's regulator, the Financial Services Authority (FSA), to discuss using its own price data as the reference price for Chi-Delta, the firm's dark pool.
Noting the resistance to its new price schedule, SIX Group issued a consultation paper to the industry in October and Chi-X Europe put its discussions with the FSA on hold, pending the outcome. The consultation is expected to elicit responses from market participants and industry bodies such as the Association for Financial Markets in Europe (AFME) which represents sell-side firms.
One possible route to a solution would be for an MTF or broker to apply direct to CESR for a waiver on the basis that its dark pool would cross at an EBBO based on data excluding that of the primary exchange. The nascent pan-European regulator has confirmed that no firm has approached it on this basis to date.
Using the primary market as a source of data makes new trading venues dependent upon their commercial rivals. But using alternative venues' data sources may not be a viable alternative in all European markets.
“You can get an EBBO from Thomson Reuters or Bloomberg today, but it may be made up of a weaker amount of liquidity at a tighter price. We need to have a proper debate about the quality as well as the structure of these decisions,” said Bowley. Nomura's MTF, reclassified from a crossing network in January 2010, trades on the mid-point but checks for any imbalance between the bid and the offer volume on the reference market, to ensure that a potential cross is not more than a certain percentage of the last published execution price and to determine whether or not liquidity on the bid and offer of the reference market is of a sufficient value. “For us the quality of the bid and the offer is really important to driving the quality of the mid-point,” he added.
In some markets, alternative venues may have shallower pools of liquidity which could lead to price formation based upon less data. The ability to determine the mid-point varies by country. In the UK it might be possible to create a mid-point without primary market data as, according to fragmentation data from systems provider Fidessa, the London Stock Exchange only has a 54% of market share for the FTSE 100 index and so MTFs such Chi-X (26.38%), BATS (12.61%) and Turquoise (6.4%) could provide an adequate level of liquidity. But that would not be possible in Spain where virtually all of the liquidity currently resides on the primary exchange.
One potential approach could be to establish minimum standards of liquidity at the bid and the offer in order to derive a mid-point price. But any new solution to the disagreement is likely to disturb the current competitive balance between different types of trading venue.
“The consultation raises questions with real economic consequences for exchanges and alternative trading platforms. We believe the competitive landscape has served Europe well and should be preserved,” said John Serocold, managing director of AFME.
Responses to SIX group's consultation are expected by the end of November.