The European Parliament has thrown the future of broker crossing networks (BCNs) into further doubt with a proposed amendment to MiFIR that effectively shoehorns all over-the-counter equity trading into systematic internalisers.
The addition to MiFIR’s article 13 made by the European Parliament’s Economic and Monetary Affairs Committee (ECON) states that trading in stocks, depository receipts, exchange-traded funds that are not executed on a regulated market or multilateral trading facility (MTF), “shall be concluded through a systematic internaliser unless the transaction involves the primary issuance of the instrument”.
MiFIR is the regulation that will accompany MiFID II and leaves member states with no room for interpretation in how they apply the rules.
Another amendment to the regulation suggested by MEPs affirms a commitment “to ensure that as much trading as possible which occurs outside regulated execution venues takes place in organised systems to which appropriate transparency requirements apply”.
If upheld, these rules would effectively force BCNs – which are currently not formally recognised under MiFID and therefore fall under the definition of OTC – to reclassify as systematic internalisers or MTFs.
Recategorising as an MTF would mean BCN operators lose the ability to decide who can access their venue and how trades are matched – factors cited by institutional buy-side firms as key attractions of the venue type. Becoming an MTF would also mean BCNs would have an obligation to publish prices on a pre-trade basis unless obtaining a MiFID-defined waiver – such as the mid-point reference waiver used by most dark pools.
Under the current MiFID II proposals, systematic internalisers will not be allowed to match two client orders but can include proprietary flow. They could also be required to publish quotes that are below ‘standard market size’.
These latest developments are the strongest indication yet that MEPs are determined to wipe out the BCN category and reduce the amount of trading considered over-the-counter.
Brokers have been urging policy makers to recognise the distinction between the need for venue functionality that caters appropriately for wholesale market participants, i.e. dark pools including BCNs, and retail traders, i.e. lit markets.
“No market - from TVs to fruit - exists that does not make a clear distinction between wholesale and retail," said Chris Jackson, head of EMEA execution sales at Citi. "This is not a question of disadvantaging one group versus another but simply a matter of maintaining order. If you wantsome understanding of the market disruption that could result from forcing institutional sized orders onto public markets (either lit or dark), go to your local Saturday market and try to buy three tonnes of oranges. Broker dark pools form a critical part of the wholesale market which cannot be fully replicated through the SI or MTF platforms”.
The MiFIR amendments follow proposed changes by ECON to MiFID II, which included the limitation of the organised trading facility (OTF) category to non-equity instruments. OTFs were introduced by the European Commission in its October draft of MiFID II as a venue category that would encompass BCN activity and allow discretion in how orders are matched. Markus Ferber, the lead MEP for ECON on the MiFID review has continually questioned the need for an additional venue classification.
“Your rapporteur questions whether the creation of a new category is the right way to capture organised venues which are not caught by the already existing categories,” wrote Ferber in an explanatory statement accompany the MiFID II amendments.
The ECON committee will now meet to discuss the amendments at the end of April.