The second version of MiFID will force brokers to shed more light on best execution and force them to provide details of their algorithmic trading tools and strategies to national regulators, according to documents seen by theTRADEnews.com.
Best execution
In the latest draft of its revision to the directive, the European Commission branded current best execution policies “generic and formulaic”, saying they “do not allow clients to understand how an order will be executed”.
To enhance investor protection, investment firms would be required to publicly disclose on an annual basis, the top five execution venues used for client orders. This would be supported by public data from each trading venue relating to the quality of executions.
In both cases, pan-European securities watchdog the European Securities and Markets Authority (ESMA) would be responsible for drafting the standards that determined the information to be disclosed.
Algorithmic trading
In the draft, a version of which will be formally released next month, the EC has said that investment firms would be required to provide details on their algorithmic trading practices once a year to their national regulators.
This would include details of strategies used, trading parameters and compliance and risk controls. National regulators would also have the power to request further information on a firm's algorithmic trading tools.
Brokers that offered market access to high-frequency trading (HFT) would also need to have the appropriate risk controls in place to ensure the resiliency of their platforms and maintain an orderly trading environment.
The new rules would also capture all firms engaged in HFT. Under the first version of the directive, firms which traded using proprietary capital – many of which engage in HFT – were exempt and did not require authorisation. However, the current version of MiFID II does not make explicit reference to market-making obligations for HFT firms or the imposition of minimum resting periods for orders.
Consolidated tape
According to the draft, the EC has elected to endorse a commercial solution to the issue of consolidated tape, allowing providers to compete based on pre-defined and supervised parameters. The Commission also suggested a consolidated tape for non-equities products could be developed two years from the inception of an equities consolidated tape.
It will also call for trading venues to unbundle pre- and post-trade data so that data vendors are able to customise their solutions to meet the needs of the market.
The EC held its first consultation on MiFID II in December last year, which ran until February 2011.
The consultation was supplemented with input from working groups that explored issues relating to post-trade data, trade reporting and a separate consultation ESMA on automated trading. Final proposals were expected to be presented to the European Parliament and the Council of the European Union by the end of Q1 2011, but were delayed until after Europe's summer break.
The latest EC paper forms part of the process before new legislation is officially presented. The internal market and services division of the European Commission will now conduct an inter-service consultation based on the draft proposals, which will be sent to the parliament and council once it has been finalised.
Most expect the final legislation to be officially presented on 21 October, but some have suggested that the directive could be delayed for a fourth time until November.