[ T H O U G H T L E A D E R S H I P | C B O E ] annual fees they charge to issuers , and through the subsequent monopoly they enjoy on Opening and Closing auction trading activity .
Natan , what would be a better and more equitable revenue distribution model for the tape ? NT : All market data contributors should be compensated in a fair manner , proportionate to the value of the data they contribute . It is legitimate to recognise that data from lit markets ( which includes pre-trade prices ) is more valuable than data from non-displayed markets , but there should be no discrimination amongst venues in the same category . Lit markets operated by pan-European operators such as Cboe Europe are pre-trade transparent , just like those run by incumbent national operators .
We believe the tape ’ s revenue sharing model should be based on each contributing venue ’ s traded notional , including a targeted subsidy for smaller listing exchanges , for example , those with less than 20 liquid instruments listed . To encourage venues to focus on growing their lit continuous markets , notional traded in lit markets should be weighted more heavily than notional traded in less transparent and non-continuous markets for the purpose of calculating tape revenues . As an example , continuous lit orderbook notional could be weighted most heavily , followed by auctions ( including periodic auctions ) and then all other addressable liquidity .
Nick , do you have concerns with other areas of the proposals ? ND : We welcome the simplification of the double volume cap mechanism for reference price waiver ( RPW ) and negotiated trade waiver activity to a single volume cap . However , lowering the remaining threshold from 8 % to 7 % has not been justified with an impact assessment . Even more problematic , the proposed introduction of a new minimum size threshold for reference price waiver activity is entirely unnecessary due to the single volume cap - and would result in more rather than less complexity . This proposal misunderstands how institutional investors execute large orders progressively and would undermine both investor choice and the pursuit of best execution in EU markets . The waiver is used to satisfy investor demand for urgent , low-impact midpoint executions , which are often the result of larger orders being broken up into smaller pieces and spread throughout the day so as not to adversely move prices . Market participants , particularly end users , are almost unanimous in their support for reference price systems .
European investors today benefit from an unprecedented level of competition and choice when it comes to trading mechanisms , and this diversity should be maintained if we want international investors , who are not subject to the EU share trading obligation ( STO ), to choose EU venues based on their attractiveness .
Natan , what would the impact of these changes be ? NT : By our initial estimates , a minimum threshold of two times Standard Market Size ( SMS ) applied to orders and trades would eliminate 90 % of orders and 94 % of trades within EU RPW venues , and 79 % of traded value – that is akin to reducing the volume cap to 1.5 %. This is far more drastic than I think was appreciated when the threshold was suggested . Does anyone believe constraining midpoint trading in this fashion will make EU markets more attractive to institutional investors ?
Past experience tells us that it is highly unlikely that those orders prevented from being executed in EU-based RPW systems would instead trade on lit markets and further improve transparency . Instead , over the counter ( OTC ) markets , third country venues and closing auctions would be the likely beneficiaries , doing little to improve intra-day price discovery .
We are passionately pro- European at Cboe – we want EU markets to be as attractive as possible to global investors – and so we have a strong preference for liquidity in EU instruments to remain centralised on EU venues . We invested a lot of time and resources in transferring liquidity in EU-listed names to our EU venue and we think it is best for investor outcomes to keep it there .
It is essential to understand that around 75 % to 80 % of institutional order flow in EU instruments comes from non-EU investors . These international investors have choice about where they can trade and are not bound by the EU STO . If you damage the attractiveness of EU trading mechanisms , such as RPW systems and systematic internalisers , there are lots of alternatives that those investors could use in jurisdictions where the value of midpoint trading to institutional investors is better appreciated . In such an outcome , the losers would be EU investors subject to the STO , unable to access sources of midpoint liquidity , and therefore subject to higher trading costs than their international peers .
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