Nasdaq says SIs have unfair advantages

Exchange group identifies fresh loopholes in MiFID II’s systematic internaliser rules.

Nasdaq has urged the European Commission to re-examine systematic internaliser (SI) rules in MiFID II, saying they will have a significant advantage over other trading venues.

According to a written response to the Commission’s amended MiFID II regulation, Nasdaq said SIs will benefit from lax rules around tick sizes and transparency, giving them an unfair advantage.

The Commission has already made an unprecedented move to clamp down on SIs by issuing revised delegated regulation preventing them from networking together, after rumours emerged earlier this year that several investment banks were planning to link their SIs and make them function in a similar manner to broker crossing networks, which will be banned from January 2018.

In its submission, Nasdaq said: “the ability of SIs to improve prices without respecting tick sizes means SIs will be allowed to offer marginally better prices to clients. In conjunction with best execution requirements, this means SIs are extremely likely to capture significant trading flows.

“Second, control over the timing of trade publication on SIs (up to 1 min) will give SIs a considerable advantage over market makers on public markets.”

It warned that leaving these issues unresolved could have unintended consequences, such as trading shifting to less transparent environments, market makers becoming SIs and not providing liquidity for public markets, and higher levels of risk in the market.

Nasdaq has asked the Commission to make targeted changes to both its level 2 and level 3 regulation.

It wants RTS 1, Article 10 to be amended to specifically state that executions must be at price levels compliant with the tick size regime.

It also asked for clarification on trade publication, which is required to take place “as close to real-time as is technically possible” but must be within one minute. Nasdaq argues a minute is a very long time in modern trading and the rules should set more specific limits to ensure all trade publication happens as soon as possible.

Many investment banks are considering whether to register as an SI or become a multilateral trading facility (MTF) once broker crossing networks are banned next year. It is thought many will prefer to become SIs due to the regulatory burden of running an MTF.