A transparent market is not necessarily a good market, according to Tim Rowe, the Financial Conduct Authority’s head of trading platforms and settlement policy.
Speaking at the Liquidity Leaders Summit in London today, Rowe debated the importance of striking a balance on transparency when implementing new regulation under MiFID II.
“In the debate between governments and regulators, transparency is seen as a good thing – a good market is a transparent market,” Rowe said. “I’ve never really bought that idea myself. The market is a means for achieving an end. You want to get a result for the trades you do, and transparency is a means to that end.”
Rowe said transparency is needed to find liquidity and best price for an asset, but equally there is space for dark pool trading, which is a legitimate way of getting business done effectively.
“The real challenge is determining the right balance, particularly as MiFID II extends the amount of transparency,” he said. “We need to have a massive amount of input by the industry.”
MiFID II, currently in its trialogue phase, has a number of rules aimed at reducing dark pool trading and increasing transparency, including a shift of trading to new organised trading facilities (OTFs) and setting caps.
Richard Metcalfe, director of regulatory affairs at the Investment Management Association (IMA), said transparency had a bigger role to play in post-trade, as it could serve as a tool for price integrity.
He highlighted the need for a consolidated tape in Europe. “We may finally be seeing some industry initiatives on that, and it’s right that MiFID II legislation is going to include some review clauses with teeth, which says that if the market doesn’t get its act together there needs to be intervention.”
Rowe agreed there was a desire for a consolidated tape, but regulators have found issues: “Who is actually going to provide it? And who is going to consume it? Is there a community out there and is it big enough to support a commercial offering of the tape?” Although the assumption has always been yes, Rowe said the consensus on how it would work is unclear.
Cost and quality of data were barriers to a consolidated tape, with prices higher in Europe than the US. Rowe told delegates both topics were covered in the MiFID II legislation, but “there is a difference between that and setting the best solution though – we will do our best.”
“Data disaggregation is something we are already looking at, how do you define between pre- and post-trade?” he said. “And ESMA will consult on that in due course. We will have the power under MiFID II to mandate that data to be chopped up in the appropriate way.”
Metcalfe said IMA members consistently asked for a consolidated tape and although there has been continued debate on who will actually use it, the industry should think about the underlying issue.
“What we are taking about here is whether exchange structures get a free reign on data,” he said.