This July, the European Commission (EC) will consider revisions to MiFID, a directive that shook up the European equity market landscape and made cross-border trading easier than ever before.
Unlike Reg NMS, the overarching equity market regulation in the US, which, among other things, obliges exchanges to route orders to other venues if they display a better price, MiFID took a principles-based approach. This allowed industry participants a certain degree of interpretation on issues such as pre- and post-trade data consolidation, trading venue classification and how to deliver best execution to clients.
But while MiFID has been a qualified success in fostering competition between trading venues and clearing counterparties, ‘market forces’ have been unable to solve problems that were identified as soon as the directive came into force in November 2007.
Grant a buy-side trader a wish for the MiFID review and more likely than not he will ask for a standardised consolidated post-trade source of data, something that has been long established in the US through the Consolidated Tape Association. The lack of consolidated post-trade data in an increasingly fragmented market seriously impedes the buy-side’s ability to evidence best execution and can skew investment decision making.
Market participants have, until now, urged regulators to let commercial solutions from data vendors set the standard. But while firms such as Thomson Reuters and Bloomberg have devised their own solutions that piece together the jigsaw of liquidity from disparate trading venues, the quality of post-trade data and the unwillingness of many domestic exchanges to unbundle or reduce the cost of their data have left the buy-side unsatisfied.
Two-and-a-half years later, regulators are now compelled to act. In its secondary markets consultation paper issued in April, designed to inform the EC as it undertakes the MiFID review, the Committee of European Securities Regulators (CESR) finally admitted that “without further regulatory intervention, market forces are unlikely to deliver adequate and affordable pan-European consolidation of transparency information”.
Then there is classification of certain types of trading venue created by MiFID. While the directive originally allowed brokers to act against high execution fees and dissatisfaction with exchange service levels, by internalising flow and establishing their own platforms, the pendulum seems to have swung the other way. It is now the exchanges, primarily through trade body the Federation of European Securities Exchanges, that have voiced their dissatisfaction with the way broker dark pools operate.
Exchanges claim that by not registering as MTFs, regulated markets or systematic internalisers, some broker dark pools have crept beneath MiFID’s radar and operate in a shroud of secrecy; a criticism that most sell-side firms brush off by claiming their internalisation processes are simply an extension of their mission to supply best execution to clients.
Again CESR feels that it might be time to spell out firmer guidance, hinting in its consultation paper that reclassification or a tightening of definitions used by brokers to categorise their venues may be on the cards. Prescriptive regulation for broker dark pools looks likely despite attempts from the sell-side to be more transparent, most recently with six brokers reporting aggregate country-by-country trading volumes in their dark pools via trade reporting facility Markit BOAT.
However, the definition of best execution, a principle introduced by MiFID to better protect end-investors, barely received a mention in CESR’s consultation paper.
Article 21 of MiFID requires firms to “take all reasonable steps to obtain the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.”
While some observers consider this definition to be insufficiently concise to provide adequate investor protection, perhaps CESR hopes that a more rules-based approach in other areas might serve to drive better execution quality.
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