European regulators make sweeping changes to Mifid in bid to fortify lit markets

The European Commission and ESMA have overhauled the Mifid II and Mifir regulations including moves to reduce dark volume caps to 7% and discourage volumes from SIs.

Europe has reaffirmed its divergent stance from the UK with significant changes to its Mifid and Mifir regulations in a bid to drive more volumes onto lit venues.

Among the key changes announced on 25 November as part of the European Commission’s Capital Markets Union (CMU) action plan after several months of delay, is the reduction of the double volume cap (DVC) for dark trading from 8% to 7%. The new measures also remove the venue-specific 4% DVC.

The European Securities and Markets Authority (ESMA) and the European Commission have also set out changes to the systematic internaliser (SI) regime that could force volumes away from the venues and into the lit markets.

These include preventing alternative trading venues (MTFs) from using the reference price waiver to execute small trades by introducing a minimum threshold. This waiver was rumoured to be scrapped all together at one point by the regulator after ongoing deliberations.

In a bid to restrict SI’s ability to match small trades at midpoint, the changes also include limiting their ability to match at mid-point to when they are trading above twice the standard market size but below the large in scale (LiS) threshold. When trading above large in scale, SIs will continue to be allowed to match at mid-point without complying to tick size.

“The mechanics of that [changes to the reference price waiver] need to be worked through, thinking about potential liquidity impacts and what that means for an industry participant being able to apply the correct routing logic on those orders so they’re not impacted by those thresholds,” James Baugh, head of European market structure at Cowen, told The TRADE.

“It’s all part of that narrative to try to curtail the amount of business transacted on MTF darks, as well as, continuing to apply pressure on SIs. The regulators are trying to encourage more transparency and trying to push more of that business to lit.”

Payment for order flow


Elsewhere, European regulators have set out plans to prohibit payment for order flow for “high-frequency traders organised as SIs”. Under the changes, venues will instead have to earn retail order flow by publishing competitive pre-trade quotes in yet another move to level the playing field between execution venues.

“For the regulators, the small trades need to go back to lit markets and that’s what they’re focusing on,” added Charlotte Decuyper, consultant at Redlap Consulting.

Less contentious among the amendments are the changes made by European regulators to its data policies under Mifid and Mifir regulation. The European Commission and ESMA have also set out plans for the implementation of a single provider of a near-real time consolidated tape for each asset class where there will be an obligation for venues to contribute their data directly to the selected providers.

“For the European exchanges it’s a strong position that they take when they say it’s bad for the market when you dilute on book liquidity and dilute the reference price but that argument goes away quite quickly with a consolidated tape,” said Baugh.  “I think if you’re a European exchange, it’s maybe a bittersweet outcome.”

ESMA and the European Commission have also made plans to scrap RTS 27 reporting in a bid to overhaul best execution metrics by refocusing them on price including explicit and implicit cost.

The changes also include scrapping the Open Access regime meaning clearinghouses in the EU will no longer be obliged to clear derivatives trades that are not executed on their vertically integrated platform.

Changes to the share trading obligation


Elsewhere, regulators have suggested amendments to the share trading obligation (STO) to only include European Economic Area (EEA) ISINS and align the derivatives trading obligation (DO) with the clearing obligation (CO) for derivatives under EMIR. Alongside this the regulator has moved to suspend the trading obligation for investment firms acting as market makers when interacting with non-EU counterparties when certain conditions are met.

The changes to the SI regime and DVCs reaffirm Europe’s stance on transparency and dark trading and its appetite for more volumes being transferred into the lit markets, unlike the UK which has continued to try and foster interest in alternative venues post-Brexit including scrapping DVCs all together.


This divergence raises the question as to whether trading volumes could return to the UK and potentially exclude European investors from pools of fragmented liquidity on these venues.

“There is a concern in Europe that if the UK makes it more attractive to trade on its venues, they are going to see flow go back to the UK. I think that is a big concern in Europe. The fact that they could be excluded from that pool of liquidity that could potentially gather in US, UK, and Swiss volumes means the EU could be a little left on the side,” said Decuyper.

“The UK is moving towards the opposite direction. They are not looking to impose any more restrictions on their SIs, they are not looking to curb dark trading, although there are also concerns that goes with that. It doesn’t mean that they are not monitoring the level of dark trading. Because I think at some point, we are nearing 15% and again at what point, does that start affecting pricing?”

In a recent panel at TradeTech, head of equities at Premier Miton, Gervais Williams, warned the audience that too much divergence could lead to the “balkanisation of liquidity” that could ultimately harm the markets.

“I think that some of the market practitioners were sort of hoping, naively or otherwise that there wouldn’t be so much divergence so quickly, but I think now that ship has sailed and I think we’re definitely seeing that happen,” added Baugh.

“Yes, it may become more expensive to do business in Europe, but equally the implicit costs of trading may also go up in London, in relative terms maybe a lot less than in Europe. What we saw with Switzerland reintroducing competition in February was that that actually led to an increase in the implicit costs of trading for a number of different reasons.”