European regulators ought to take steps to force equity trading onto lit markets to improve market transparency for the benefit of investors, according to the CFA Institute, a global body representing investment professionals.
“Displayed liquidity can underpin investors' faith in the markets and the reliability of the price formation process,” said Rhodri Preece, director of capital markets policy and author of a study the organisation will submit to a consultation on MiFID II launched by the European Commission (EC) in December.
The report uses an analysis of European equities markets to demonstrate that high levels of transparency broadly correlate with low average bid-offer spreads, thereby establishing a link between transparency, low trading costs and investor confidence.
Based on its research, the CFA Institute says regulators should encourage trading back onto lit markets, with only “ad hoc, large, or non-standard transactions” being executed through OTC channels. Dark pools, it argues, should be subjected to minimum order size restrictions, while MiFID's existing large-in-scale waiver size should remain untouched. The organisation also supports the EC's proposal for broker crossing networks to be categorised as multilateral trading facilities if they trade above a certain volume and engage with external trading flow.
“Currently, placing an order of any reasonable size on a lit venue will result in the market moving against you because liquidity is shallower,” Preece told theTRADEnews.com. “Lit volumes have been eroded with business moving off-exchange. It makes it harder to do deals on the lit market and we want to level the playing field.”
Separately, the report noted the CFA Institute's support of recommendations by the Committee of European Securities Regulators, the pan-European regulatory body which provided technical advice to the EC, to create a consolidated tape of post-trade price data, introduce approved publication arrangements to standardise post-trade reporting and shorten the acceptable publication period for post-trade reports.
The CFA Institute study identified eight types of trades – order book (lit & hidden), dark order book, auction, on-exchange reported (delayed & real-time) and off-exchange (delayed and real time) – then assigned a transparency score to each classification. A transparency index was then constructed for the Dutch, French, German, Spanish and UK markets for the month of October 2010, based on the market share of each trade type in these local markets.