[ F I N A L
T H O U G H T S
|
H AY L E Y
M C D O W E L L ]
Hayley’s
Comment
Misguided intervention
Senior reporter Hayley McDowell examines ESMA’s investigations into periodic
auctions and asks what it could mean for the future of trading post-MiFID II.
I
n November, the European Se-
curities and Markets (ESMA) re-
leased its findings on the operation
of periodic auctions under MiFID
II, with some interesting results.
The European watchdog agreed
with concerns raised by European
national regulatory authorities and
some asset managers that, to some
extent, the venues are being used
to evade dark trading rules and the
double volume caps (DVCs). ESMA
is seeking further comment on the
issue before moving forward with
plans to curtail auction activity, but
this approach could be considered
misguided.
Separate research from the UK’s
Financial Conduct Authority (FCA)
and Rosenblatt Securities has
deduced that dark trading begins to
negatively affect market quality at
a lower percentage of market turn-
over than the percentage at which
the caps trigger bans on stocks.
Any market participant will
tell you that there is an import-
ant place for dark trading in the
98 // TheTrade // Winter 2018
industry, with some going so far as
to say that the DVCs were merely
a political compromise made by
people with a lack of understand-
ing on how markets truly operate.
So, it’s no wonder that we’ve seen
the rise of periodic auction sys-
tems as the industry navigates the
newly-formed trading landscape
which limits such important
activity.
It’s becoming more likely that
ESMA will make its move to im-
pose restrictions on periodic auc-
tion systems, but will this stop the
industry coming up with another
innovative method to continue
trading efficiently under MiFID
II’s dark trading rules?
Perhaps ESMA should question
the potentially harmful impact of
the DVCs and consider adapting
the caps to reflect the need for
dark trading. If the rules are not
adapted, we risk seeing a back-and-
forth scenario for years to come
as authorities try to stifle inno-
vation, thus costing the industry
significant amounts of money and
wasting time for all involved.
This could play out with the rise
of request for quote (RFQ) systems
in equities trading (see page 58).
Despite reportedly unclear demand
for RFQ, trading venues have
launched the systems bearing in
mind that RFQ is considered to be
lit, pre-trade transparent activity,
and therefore exempt from MiFID
II’s DVCs.
So, what if, a year from now,
the RFQ begins to see increased
volumes and potentially some
pre-matched activity, as we’ve seen
with the periodic auctions, and
ESMA starts another investigation?
If auctions and consequently the
RFQ are restricted by financial
authorities in Europe, who’s to say
another system will not be devel-
oped to avoid the DVCs? Eventual-
ly, ESMA will be forced to consider
that the issue is not with the inno-
vative nature of the industry, but
instead that some aspects of MiFID
II are simply not working.