Europe’s largest markets operator says it, too, wants regulators to strip the new stock-trading venues, known as systematic internalisers, or SIs, of the ability to price stocks more flexibly than exchanges can. Critics claim that the price advantage could allow SIs to siphon away trading from public markets – exactly the opposite of what was intended with MiFID.
One broker called SI trading the “greatest challenge ahead for the industry.”
Alexandra Hachmeister, chief regulatory officer at the owner of the Frankfurt Stock Exchange, said MiFID is unfair in that systematic internalisers, or SIs, don’t have to follow the same “tick-size” rules as everyone else.
“There are some loopholes still in the document” of MiFID’s rules, she said in a Bloomberg Television interview recorded on November 8. “SIs still have the opportunity to somehow provide meaningless price improvement that gives them an advantage to lit markets that might allow them to capture a relevant part of the trading flow.”
Fellow stock-exchange operator Euronext NV and Markus Ferber, the European Parliament member responsible for shepherding MiFID II into law, have also spoken out against the tick-size price advantage.
Regulators have taken notice. On November 9, the European Securities and Markets Authority proposed rewriting part of MiFID II to force systematic internalisers to follow the same rules as stock exchanges. A Deutsche Boerse spokeswoman said that the exchange backs ESMA’s plan. SIs, which are dark venues because they can offer bespoke quotes and they don’t have to disclose order sizes, could have used MiFID II to buy and sell stocks at marginally better prices than other trading venues. That created a problem for the EU’s regulators, who aimed to curb dark trading under MiFID.
The tick-size difference has been controversial. One algorithmic trader predicted that dark trading of European stocks would triple over the next year or two, with the price advantage of SIs pushing trading onto the new venues.
Uncertainty about how SIs will operate is shared by asset managers. The majority of fund managers say they don’t know how the new stock-trading venues run by banks and speed traders will operate under MiFID II, according to a survey by Liquidnet Holdings Inc, a US broker and dark-pool operator.
Most fund managers who took part in the survey said they either lacked confidence in understanding how the new venues will work or they needed more information.
“The greatest challenge ahead for the industry is the switch from broker dark pools to systematic internalisers,” Liquidnet said in a report sent to clients last week. “This potential to rewrite the liquidity landscape may inadvertently reverse the recent trend of greater transparency in dark trading.”
Liquidnet surveyed 51 heads of dealing at fund managers during August. Most were based in the UK, with the remaining 48% being evenly split between the US and continental Europe.
Deutsche Boerse’s Hachmeister also discussed another sore point among those grappling with MiFID. She said regulators are debating how to handle one of the law’s most disruptive rule changes –the requirement that traders and investors include personal information when they place an order. The personal-identification requirement is unenforceable in countries including Switzerland, where it is illegal to supply personal data to a commercial organisation.
“My understanding to this point is that the national competent authorities are jointly discussing solutions to this problem,” Hachmeister said.
The plaque of the Deutsche Boerse is pictured at the entrance of the Frankfurt Stock Exchange. Deutsche Boerse has joined those criticising a new type of trading venue being ushered in by Europe’s MiFID II rules.