THETRADETECH DAILY THE OFFICIAL NEWSPAPER OF TRADETECH 2021
Regulation
... continued from front page Equivalence discussions between the UK and Europe have been largely fruitless and a stalemate relating specifically to the share trading obligation meant that the UK saw roughly € 6 billion in daily trading volumes move away from the City to European capitals such as Paris and Amsterdam in the week following Brexit .
The STO has been hugely controversial with major UK-based stocks initially caught in a political crossfire as the EU confirmed plans to adopt a less holistic approach to the rules . Following widespread concerns across the industry , the EU revised its approach last year and then again just last month in a bid to minimise disruption once the Brexit transition period ended in early 2021 . The proposed removal of STO could eradicate any possibility of an equivalence decision ever being reached .
Elsewhere , dark pool trading has been a key area of focus as the UK aims to attract more business to the City , with the removal of DVCs further underscoring this position . The UK ’ s Financial Conduct Authority ( FCA ) has already lowered the large-in-scale ( LIS ) thresholds for dark pool trading to a blanket minimum threshold of € 15,000 .
The EU , however , maintained a minimum threshold of € 650,000 and under the MiFID II regulation regulators have made it clear that they remain steadfast in their intention to restrict dark trading in Europe .
“ Scrapping the DVCs has been on the cards pretty much since Brexit got done , however , only time will tell as to exactly what impact it will have on equity market structure ,” Varghese Thomas , president and COO of TradingScreen , commented on the development .
“ The removal of the caps could be a boost to the trading of these stocks , which struggle to operate efficiently if a buy-side trader has to inform the wider market of their intentions to trade in what is typically an illiquid market .”
The FCA published an in-depth study on the impact of dark trading on costs in February , stating that trading in dark pools and periodic auctions can reduce transaction costs while more transparent venues incur higher costs and implementation shortfall .
In one example , the FCA said that when dark trading is not subject to bans a 10 % increase in the proportion of a parent order executed in a dark venue reduces implementation shortfall by 0.97 bps .
The findings contradict similar research from the EU which has made efforts to restrict trading in dark pools to increase activity that
UK scraps MiFID II requirements in ambitious capital markets reform
MAJOR REFORMS TO THE UK CAPITAL MARKETS PROPOSED BY THE UK TREASURY INCLUDE THE REMOVAL OF THE SHARE TRADING OBLIGATION AND THE CONTRO- VERSIAL DOUBLE VOLUME CAPS FOR DARK TRADING .
“ There has been market failure in this area for some time and MiFID II has made this market failure worse .”
UK TREASURY
occurs on pre-trade transparent or ‘ lit ’ venues . The EU introduced DVCs in 2018 under MiFID II that trigger bans on dark trading when a transaction reaches a certain size .
The European Securities and Markets Authority ( ESMA ) stated in its MiFID II review consultation in February 2020 that the DVCs have had a positive , but limited impact on market liquidity since they were implemented , and these benefits need to be balanced against the complexity of the DVC system .
Market participants and buy-side traders have been vocal with criticisms on the general move by regulators in Europe to curb dark trading , which they say allows for minimal market impact and often the best price for clients . Upon acknowledging that MiFID II had failed in its overarching objective to increase transparency , ESMA put forward various proposed modifications to the DVCs in its MiFID II review consultation , including
“ The removal of the caps could be a boost to the trading of stocks which struggle to operate efficiently if a buy-side trader has to inform the wider market of their intentions to trade .”
VARGHESE THOMAS , PRESIDENT AND COO , TRADINGSCREEN extending the scope of the system , adjusting waivers or removing the DVCs completely in favour of another method to restrict dark trading .
Periodic auctions also came under intense regulatory scrutiny after ESMA expressed concerns that the venues were being used to circumvent the rules on dark trading . Amid fears the EU watchdog would ban periodic auctions , ESMA eventually opted to make minor changes to how the systems should operate .
In its listings review on 3 March , the UK Treasury also claimed MiFID II ’ s unbundling requirements have had a detrimental impact on SME research . Like dark trading , the EU ’ s rules on research have been controversial since they were implemented in 2018 under MiFID II .
Critics have claimed unbundling , which enforced the separation of payments for institutional research and execution , has reduced research coverage , quality and the number of analysts , and dented liquidity in certain stocks .
Regulators across Europe hold conflicting views on the impact unbundling has had on the institutional research marketplace . France ’ s Autorité des Marchés Financiers ( AMF ) and the French Treasury strongly supported the changes to the research rules , but ESMA was less in favour of rolling back unbundling requirements .
“ The funding of SME research is vital to ensuring enough information on which to base investment decisions is available to investors . There has been market failure in this area for some time and MiFID II has made this market failure worse ,” the UK Treasury said in its
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