The FIA European Principal Traders Association (FIA EPTA) has today released a report suggesting a portion of trading left unreported is partially to blame for the negative picture painted around declining volumes in the Bloc.
According to the association, the current Post-Trade Transparency (PTT) regime under Mifid in Europe does not obligate traders to report a transaction executed in a broker’s internal systematic internaliser (SI) in relation to a synthetic instrument.
The reporting gap relates to hedging using a synthetic instrument. When executed via a regulated market/multilateral trading facility, an external SI or another form of over the counter (OTC) trading where the broker interacts with third party liquidity, the trade and volume is reported under the PTT regime.
However, in its report, FIA EPTA suggests that if the trade is executed via an internal SI, for example against another hedge of a synthetic instrument in its SI, then the resulting trade has said broker as both the buyer and the seller of the trade – thus not recognising it under the PTT framework for printing into the market.
“This is how the transparency gap comes into being,” FIA EPTA said in its report, adding that the current unreported segment is unquantifiable at this stage.
“Bringing these volumes into the scope of the Mifid II post-trade transparency framework will, therefore, give a more accurate and (given the significant size relative to the other execution scenarios) a more positive picture of European equity volumes.”
FIA EPTA suggests that in order to plug this reporting gap in order to gain a more accurate picture of the market, the PTT must be altered to ensure that an executing broker fulfilling a trade using its own inventory internally should report the trade as if it were taking place on an external SI or trading venue.
Europe’s suffering liquidity has repeatedly come under fire in recent months, becoming the poster child for many conference discussions around how to fix the Bloc and reinvigorate interest in trading in the region.
Declining volumes and the perception that Europe is falling behind have been blamed for a lack of listings and capital allocation when compared to the US and Asia markets. Many suggest this is now becoming a self-fulfilling prophecy, whereby negative rhetoric has further discouraged interest in the region.
In its report, the FIA EPTA suggests that with this segment of trading relating to hedging remaining unreported, investors do not have the full European picture and therefore “incomplete conclusions will continue to be drawn regarding appropriate market structure needed in European equity markets”.
“This trading activity (and the economic interest in European equity markets that it reflects) is not just obscured or hard to find, it is completely missing,” the FIA EPTA has said in its conclusion.
“As a consequence, European share trading volumes are being perceived by the market (including global investors and issuers) as being significantly lower than they actually are. No one has the full picture. When viewed in combination with the fragmented nature of Europe’s trading landscape and the lack, as of yet, of a consolidated tape, it becomes easier to see why investors and issuers are shunning European markets in favour of other global financial centres.”
Instead, the association has insisted that regulators in Europe and the UK must push forward with the implementation of a consolidated tape for shares and ETFs so that the “full scope of trading” becomes clearer.
“Without this, Europe risks being left behind,” the association said.