EU regulator seeks further evidence on concerns auction systems evade MiFID II rules

Controversial auction systems face regulatory intervention in Europe if ESMA finds the mechanism does not operate in the spirit of MiFID II.

Periodic auction systems are under further scrutiny from the EU markets watchdog after a call for evidence was published on concerns that the mechanism is being used to circumvent rules under MiFID II.

The European Securities and Markets Authority (ESMA) said today that it is seeking further information to assess whether, and to which extent, periodic auction systems can evade MiFID II transparency requirements such as the double volume caps (DVCs).

The call for evidence published by ESMA analysed pre-trade transparency, auction durations and self-matching activities after the regulator undertook a ‘fact-finding exercise’ on the venues. It found that the rise of auction systems seems to be “to a large extent driven by instruments that have been suspended under the DVCs”. 

“MiFID II aims to increase transparency of equity markets and foster competition between different type of market participants on a level-playing field. In order to deliver on this objective it introduces various provisions,” said Steven Maijoor, chair of ESMA. “If ESMA comes to the conclusion that frequent batch auction systems violate the spirit and the rules of MiFID II, we will develop appropriate policy responses.”

Maijoor has been outspoken about the regulator’s concerns about periodic auctions, which have emerged as a result of MiFID II, following a surge in volumes on the systems launched by the likes of Cboe Global Markets and the London Stock Exchange Group. 

In the past, Maijoor has said 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, volumes have migrated towards auctions leading to scrutiny from European regulators and concerns on how they are being used.   

“In noting both the growth in market share of frequent batch auctions and stakeholders’ concerns, this call for evidence will allow ESMA to gather more information on the functioning of frequent batch auction trading systems. Using this evidence, we will assess whether they can be used to circumvent the DVC and other pre-trade transparency requirements under MiFID II,” Maijoor added about the call evidence.

European regulators and the buy-side have expressed concerns around the surge in volumes and the use of periodic auctions over the past year. Senior buy-siders have also highlighted the need for regulatory tightening to curb broker-preferencing in order to distinguish between addressable and non-addressable liquidity. Both LSEG and Cboe have countered 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%.

Stakeholders have until 11 January next year to submit comments on the call for evidence, after which ESMA will make a decision on its plans moving forward. Earlier this week, Kay Swinburne, MEP and one of MiFID II’s authors, said that Brexit and other European political factors will likely be the main drivers for changes to the regulation.