Some of Europe’s largest multilateral trading facilities (MTFs) have called for a quick resolution to the regulatory confusion surrounding non-displayed trading functionality and criticised the restrictions imposed by the current regime.
In recent months, the ability for trading venues to waive pre-trade transparency requirements, and therefore retain anonymity of orders, has come under scrutiny from UK regulator the Financial Services Authority (FSA) and the Committee of European Regulators (CESR), a European Commission group that monitors regulatory implementation across the continent.
Participants in a panel discussion on the European exchange environment at yesterday’s FIX Protocol EMEA Trading Conference in London, which included representatives from MTFs Turquoise, Chi-X, NYFIX Euro Millennium, Baikal and Nasdaq OMX Europe, hit out at certain aspects of the pre-trade transparency waivers. The large-in-scale (LIS) waiver, which allows trading venues to forego the publication of pre-trade quotes if orders exceed a CESR-defined minimum proportion of the average daily turnover and market capitalisation of a stock, came in for particularly heavy criticism.
“Current regulations governing dark trading have proven inflexible,” said Eli Lederman, CEO, Turquoise. “Average order sizes in Europe have decreased and LIS restrictions, which are set formulaically and only reviewed once per year, do not reflect today’s market environment. Recognising the obstacles of LIS orders, we are working with the regulators to introduce a new non-LIS model in the next few weeks.”
George Andreadis, head of AES liquidity strategy, Credit Suisse, and moderator of the panel, added that current technology that further reduces order sizes, such as smart order routing, may render many orders too small to meet LIS requirements and could make venues that use this waiver ineffective.
The LIS waiver is one of four pre-trade transparency waivers under MiFID. Others include the reference price waiver, where prices must be determined by a “reliable and widely published source”, and the negotiated transaction waiver, which exempts orders that are privately negotiated but executed on a trading venue from pre-trade transparency.
All panel members agreed that a greater level of cooperation between trading venues and regulators would be crucial in solving the confusion and ensuring the continuing development of pan-European market structure.
“Venues with non-displayed functionality will need to continue to work with the FSA and CESR if we are going to deliver innovative solutions and a more productive and efficient marketplace,” said Lederman.