Mifid II London roadshow: Is regulatory divergence harming end investors?

Speaking on a panel hosted by The TRADE at the London Stock Exchange, panellists were divided on whether systematic internaliser reforms in the UK were benefitting or harming end investors.

Industry participants are divided on whether diverging approaches to the systematic internaliser (SI) regime favoured by Europe and the UK post-Brexit will hinder end investors.

Following the UK’s departure from the European Union, Europe has favoured stringent rules around the SI regime including limiting their ability to match at mid-point on small trades and from using the reference price waiver to execute small trades by introducing a minimum threshold.

The UK in its Wholesale Markets Review (WMR) has taken a divergent approach, scrapping limits on SIs all together. These differing approaches have created what one panellist referred to as a “philosophically different approach to price formation” on either side of the channel.

Panellists speaking on the market structure and regulatory divergence panel hosted by The TRADE at the London Stock Exchange (LSE) on Tuesday were divided on whether the UK’s liberal approach would favour end investors or hinder them by damaging price formation and allowing institutions with the best technology to take advantage of access to private information that the rest of the market could not see.

“The more bilateral trading you have in the marketplace and the more private interactions that are happening out there, will mean there are advantages for certain people,” said one panellist.

“Some say that’s fair and reasonable but there are others who are worried that the smartest people in the room are touching flow that’s not been seen by others and as a result are making decisions based on private information. If I can’t access all those puddles of liquidity I’m going to be at a disadvantage. Yes, brokers can weave it all together for me, but that’s very convenient for brokers.”

Europe’s approach to limiting the quasi-dark trading mechanisms has been focused on smaller trades with the aim of pushing them back onto lit markets, leaving larger trades within the remit to be executed on SIs to limit market leakage.

“SIs have a place but we are concerned about the proliferation of bilateral mechanisms that are not offering an outcome that is any different from a normal trading facility. Same price, same size. Why is that liquidity not coming together to help deepen price liquidity?” the panellist continued.

However, this view was not upheld by all those on stage, with other panellists questioning where regulators should draw the line to define what constitutes a private network.

“Where is a private network? If someone has a dealer board and have buy-side phoning up wanting to trade a piece of risk is that a private network? Or is it the fact that you’re processing it electronically and you’re connecting a network together to process an electronic message.”


Regulators on both sides of the channel have favoured the scrapping of best execution RTS 27 and 28 reports and all panellists agreed this was a step in the right direction. However, with the reports gone and without a tape implemented, some participants raised the question of how best execution could be fairly measured.

“How do we ensure best execution? We need a tape to ensure best execution if RTS 28 reports are being scrapped and with no common benchmark,” said one participant.

“The US has a tape for every asset class. Our deferrals need to change too. Who cares about a trade that happened 4 weeks ago? Even the 605 and 606 reports in the US, those reports are helpful. Let’s replace RTS 27 and 28 reports with something helpful that allows us to do the maths and assess what is really happening. Until we have that we can’t prove best execution.”

Another speaker stressed the importance of post-trade transparency as a price indicator, highlighting that with it there was little need for pre-trade transparency within a consolidated tape in Europe and the UK. Whether or not the tape should include pre- and post-trade data has been a widely debated subject.

Both the UK and Europe have put forward proposals for a consolidated tape in their various regulatory reforms with Europe opting for a single post-trade tape provider per asset class and the UK yet to confirm whether it will opt for multiple tape providers and whether will be either post- or pre-trade or both.

“The next pre-trade transparency is the last post-trade transparency. The most important thing is post-trade transparency because it’s what the market paid for a particular security. It’s a true telling price,” the panellist said.


All panellists agreed that the vastly divergent approaches to regulation taken by the UK and post-Brexit had had and would continue to have a “detrimental” effect on liquidity. Upon the completion of Brexit, a lack of an equivalence decision between the two entities saw upwards of 95% of EEA securities trading migrate to Europe from the City. As rules diverge further, there is potential for this liquidity to become even further fragmented depending on the range of rules in each region.

“Pools of liquidity being segregated for investors is not what we want to see. We leaned on brokers heavily when there was that migration of liquidity to European venues. With divergence it’ll be the same again,” said panellist.

The market structure and regulatory divergence panel was part of a series of three panels hosted by The TRADE at LSE on Tuesday as part of its inaugural Mifid II Review Roadshow, attended by over one hundred industry participants. Click here for more information about additional Mifid Roadshow events taking place across Europe this summer.