The European Parliament’s Economic and Monetary Affairs Committee (ECON) will meet next week to finalise its version of MiFID II, with debate on high-frequency trading (HFT) likely to lead the agenda following a new UK government study.
Two meetings of ECON are scheduled for 10 and 13 September in Strasbourg, with a vote on the final MiFID II text set for 26 September.
Prominent areas of discussion for MEPs as they enter the final stages of debate on MiFID II are likely to be HFT and the treatment of broker crossing networks (BCN), which could fall under a new regulatory regime in the revised directive.
ECON was initially due to finalise its version of MiFID II in July but the sheer number of amendments tabled by MEPs meant the decision was deferred until after the Parliament’s summer break.
The debate on HFT has gathered pace during the MEPs’ break, with the German government proposing new regulation to control HFT activity and the publication of a report by Foresight, a UK government-funded investigation into computer-based trading.
The Foresight report, authored by 35 finance academics and professionals, examined some of the HFT proposals in the European Commission’s original MiFID II text last October and initial amendments made by Markus Ferber MEP, the figurehead for ECON’s reading of the directive, and sent its preliminary findings directly to MEPs.
The study analysed the requirement for all algorithmic trading strategies to be in continuous operation throughout the trading day, a harmonised circuit breaker regime across European trading venues, order-to-execution ratios and minimum tick sizes. The Foresight report also looked at Ferber’s added proposal to impose a minimum resting time of 500 milliseconds for all orders.
The study found that minimum resting times would expose liquidity providers that place orders across multiple markets to increased risk, as they would be unable to cancel stale orders. It also cautioned that order-to-execution ratios could curtail beneficial strategies and suggested that fees on excessive orders charged by exchanges could be a better option. The report backed a coordinated approach to circuit breakers that would halt trades in extremely volatile market conditions and supported the need for a coherent tick size regime across markets to limit excessive competition for liquidity.
Rickard Ydrenäs, policy advisor to Olle Schmidt MEP and member of the Alliance for Liberals and Democrats in Europe, said the Foresight report would help stimulate further debate on the HFT proposals and matches his group’s stance on minimum resting times, a view held by only one other group in ECON.
“This report gives us more facts and arguments to support our position on minimum resting times – we believe it will harm the market,” he said. “The report also backs our views on circuit breakers and market making obligations.”
In a statement to theTRADEnews.com, Ferber agreed the Foresight document would boost the evidence already accumulated, adding that many points in the report supported the current draft.
“The document concludes that coherent tick sizes across Europe might be a desirable option,” he said, adding that he believed a wide range of views on HFT had already been considered during the ECON process.
“The process is still ongoing, although it would have been better to have such a report at an earlier stage of the procedure as we are already negotiating the compromises in ECON,” he added.
Further discussion on how to control HFT was raised in August after German lawmakers drafted legislation to bring HFT firms under the control of the national financial watchdog. Ferber has backed the German proposals despite the fact they would come into affect in mid-2013, at least six months before MiFID II is due to be enforced.
Following the European Commission’s October 2011 draft of MiFID, Ferber issued a public questionnaire seeking views on the proposals. He used the feedback and subsequent meetings with MEPs to form his own amendments to the Commission text, which were released in March. Other members of ECON then submitted their suggestions for MiFID II.
After ECON's version of MiFID II is finalised, the Council of the European Union, a collection of member states' finance ministers, will agree a separate version of the text, before both versions are reconciled, with input from the European Commission.
Another area of contention in the MiFID II debate will the treatment of broker crossing networks. In its October draft, the European Commission proposed the creation of the organised trading facility (OTF), a new umbrella trading venue category that would capture BCNs and new markets that would emerge as a result of OTC derivatives regulation. OTFs would be given a degree of discretion on how they match orders, according to the Commission's proposals.
In his amendments, Ferber suggested that OTFs should exclude equities, thereby forcing BCNs, which are currently classified as over-the-counter trading in MiFID, to reclassify as MTFs or systematic internalisers (SI). As MTFs, brokers would lose the ability to decide who can access their BCN and how trades are matched. Reclassifying BCNs as a SI would prohibit brokers from matching two client orders and oblige them to publish quotes that are below ‘standard market size’. Brokers maintain that discretion on how orders are matched in their BCNs are part of a service offering that aims to achieve best execution for buy-side clients.