David Lawton, head of market infrastructure and policy at UK regulator the Financial Services Authority (FSA), told the TradeTech conference in London that the European Commission (EC) should drop the proposed new organised trading facility (OTF) category from MiFID II.
“The OTF regime is so broad in scope it is in danger of capturing forms of trading that are neither organised nor venue-like,” he said. “The FSA recommends retaining the existing categorisation of trading venues.”
OTF is a new catch-all grouping, first outlined in the EC's MiFID consultation paper, that is intended to remove the risk that matches for trades could occur in unregulated environments.
Lawton also supported creating a new category of derivatives trading venue to honour the commitments made by the Group of 20 (G20) countries to move trading on exchange where possible, and the creation of a new broker crossing network category for systems that execute client orders with client orders, so that sell-side matching systems were not unregulated. Once these two steps had been taken, there would be no need for an additional category, argued Lawton, warning also that broker networks and OTFs should not be re-categorised if they passed a threshold of trading volumes as has also been proposed. “If a venue does not meet the definition of a multilateral trading facility it should not be regulated as such,” he said.
Rather than supporting the various proposals for regulating high-frequency trading, which include minimum resting times for orders, fixing a permitted ratio of orders to trades and requirements for firms to become authorised if they process above a certain volume of trades, Lawton said the FSA preferred a more flexible approach.
The FSA believes HFT firms should be authorised if they are direct members of an exchange and a robust regime should be put in place to ensure algorithms and market access are provided with the right controls in place. He added that there was insufficient evidence to draw conclusions as to the effect that HFT has upon liquidity, which meant restricting the volume of business it conducted would be unwarranted.
Tim Rowe, manager, trading platforms and settlement policy, FSA, also speaking at TradeTech, said that a recent consultation by the European Securities and Markets Authority (ESMA) on HFT would lay the groundwork for development of rules on HFT that best reflected the markets' view of it. The results of the research, which closed on 23 March, were still being collated but Rowe said that what he'd seen so far was both interesting and surprising.