Planned revisions to MiFID must guarantee that financial markets serve the real economy, said Markus Ferber MEP, who will play a key role in guiding the legislation through the European Parliament as rapporteur for its Economic and Monetary Affairs (ECON) committee.
Speaking to theTRADEnews.com, Ferber stressed restrictions on certain algorithmic trading strategies and greater post-trade transparency would be among the major considerations for the ECON committee.
“High-frequency trading (HFT) is not the issue, its more those algorithms that have the sole intention of trying to work out what’s going on in the market and profit from arbitrage business. The question is: are these types of strategies really needed in the market?” said Ferber. “It is still early in the process and I am not sure of the ideal way to regulate this, but it is something I will take a strong view on.”
Under the current proposals from the European Commission (EC), all users of algorithms would be required to constantly provide liquidity. Although the rule has been widely criticised for capturing a wider range of market participants than the electronic market makers that the EC wants to prevent from exiting the market in times of volatility – thus avoiding a repeat of the US flash crash of May 2010 – officials have reaffirmed their intentions.
“We are committed to this proposal,” Valérie Ledure, senior policy officer for securities markets at the EC’s Directorate-General of Internal Market and Services, told theTRADEnews.com last week. “That is not going to change. But we are open for constructive suggestions on how to improve the rule.”
A further core issue for MEPs, said Ferber, would be post-trade transparency, particularly for broker crossing networks and trades conducted OTC. Currently there is no standard way of distinguishing between the different types of trades conducted off-exchange, which means market participants are unable to determine which transactions they need to include for analysis or benchmarking purposes. However, a working group set up by financial messaging standards body FIX Protocol is currently working on implementing a series of flags designed to tag OTC data.
“I am not putting dark pools into question, but what was very interesting in the [5 December MiFID stakeholder] hearing was the observation that almost 50% of shares are not traded on regulated markets,” said Ferber. “With this in mind, can we really say that we have a transparent price discovery process?”
Lack of agreement on how to calculate off-exchange transactions has led to a series of disputes on the volume of equity transactions conducted on an OTC basis. According to Thomson Reuters, trading on non-displayed multilateral trading facilities typically accounts for around 3-4% of all equity trading activity in Europe. However, the data provider reported that real-time and delayed OTC equity trading accounted for €526 billion – or 41% – of all European equity trading in November.
The MEP also reiterated his doubts on whether organised trading facilities (OTFs) – a new category of trading venues created by the EC to capture broker crossing engines and new platforms for OTC derivatives – were necessary.
“If firms are already exploiting loopholes in the existing framework, why should we invent a new category of venue as opposed to better enforcing the three that already exist,” said Ferber. “It was interesting that colleagues from other political groups were also questioning the merits of the OTF regime.”
The ECON committee’s stakeholder meeting on 5 December followed the publication of the EC’s final MiFID II proposals in October. The next ECON meeting is scheduled for 13 February 2012, but Ferber is unsure how long the Parliament’s debate will run for.
“I anticipate that we will have a huge number of amendments to make to the EC text,” he said. “As well as market structure, there are also a lot issues in other areas related to transparency in the derivatives market and the extension of the directive to commodity and bond markets.”
After the Parliament has agreed on amendments it wishes to make to the text, the Council of the European Union will then conduct its own reading of the revised legislation. The implementation of MiFID II is expected at some point during 2014.