Proposals to limit off-exchange stock trading volumes could drive investors away from Europe, Seth Merrin, CEO of Liquidnet, operator of an institutional block trading platform, has warned.
The MiFID II text agreed by European Union member states last week agreed caps for the amount of trading that can be conducted on multilateral trading facilities (MTFs) that use of the reference price waiver to avoid pre-trade price transparency.
Affected trading venues include Liquidnet, a block crossing facility that is registered as an MTF in Europe and matches trades at the mid-point of the bid and offer of the primary market at the time of execution. Liquidnet also offers a service that permits members to negotiate trades with each other.
If approved, MiFID II - which updates Europe's securities market trading and investment framework - will implement a 4% volume cap on the amount of trading that can be conducted in a single security on a single venue using a reference price waiver, as well as an 8% upper limit on trading in a single name across all such venues. Beyond these levels, orders must be redirected on to lit markets.
Merrin warned against imposing new rules that could make it more expensive for institutional investors to invest in European companies could have dire consequences for the region's economic outlook.
"My message to Europe's policy makers is this: do not disadvantage the ability of investors to put capital to work in your country. There is plenty of competition for flow right now," he told www.thetradenews.com.
However, the member states' position is at odds with the MiFID text agreed by the European Parliament, which does not permit equities to be traded in a new form of trading venue, the organised trading facility, introduced in MiFID II to facilitate automation and exchange trading of OTC derivatives.
Differences between the member states and MEPs will be ironed out in a 'trialogue' process, which could start before the summer break, Markus Ferber MEP, rapporteur for MiFID II, told www.thetradenews.com last week.
New opportunities
Merrin said that that Liquinet had made no commitment yet to extending its service offering from equities to fixed income despite admitting that the market "could represent a huge opportunity" for the firm.
Since chairman Ben Bernanke recently signaled the US Federal Reserve's intention to begin to taper its quantitative easing program, bond yields have jumped in response, leading to a mass exodus.
Many predict that, as capital leaves the fixed income market, equity prices that have been artificially inflated on the back of cheap borrowing conditions will begin to fall, prompting a shift into equities and improving trading volumes, which have been low since the 2008 financial crisis. But the new regulatory conditions for banks - which has forced them to scale back their balance sheets - leaves them inadequately resourced to support the so-called great rotation.
"US$1trillion left equities for bonds over the last decade, but banks now have only a quarter of the capital they once had and so are finding it hard to facilitate the rotation," says Merrin.
Electronic trading platforms have seen increased volumes as investors have increasingly traded on an agency rather than principal basis with bank counterparts. But Merrin remains adamant that Liquidnet is not yet ready to enter the market.
"We haven't finished assessing the opportunity yet. We're not going to enter the market until we are certain we can add value," he said.