THETRADETECH DAILY THE OFFICIAL NEWSPAPER OF TRADETECH 2022
Regulation
European regulators make sweeping changes to Mifid in bid to fortify lit markets
THE EUROPEAN COMMISSION AND ESMA HAVE OVERHAULED THE MIFID II AND MI- FIR REGULATIONS INCLUDING MOVES TO REDUCE DARK VOLUME CAPS TO 7 % AND DISCOURAGE VOLUMES FROM SIS .
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These include preventing alternative trading venues ( MTFs ) from using the reference price waiver to execute small trades by introducing a minimum threshold . This waiver was rumoured to be scrapped all together at one point by the regulator after ongoing deliberations .
In a bid to restrict SI ’ s ability to match small trades at midpoint , the changes also include limiting their ability to match at mid-point to when they are trading above twice the standard market size but below the large in scale ( LiS ) threshold . When trading above large in scale , SIs will continue to be allowed to match at midpoint without complying to tick size .
“ The mechanics of that [ changes to the reference price waiver ] need to be worked through , thinking about potential liquidity impacts and what that means for an industry participant being able to apply the correct routing logic on those orders so they ’ re not impacted by those thresholds ,” said James Baugh , head of European market structure at Cowen .
“ It ’ s all part of that narrative to try to curtail the amount of business transacted on MTF darks , as well as , continuing to apply pressure on SIs . The regulators are trying to encourage more transparency and trying to push more of that business to lit .”
Payment for order flow Elsewhere , European regulators have set out plans to prohibit payment for order flow for “ high-frequency traders organised as SIs ”. Under the changes , venues will instead have to earn retail order flow by publishing competitive pretrade quotes in yet another move to level the playing field between execution venues .
“ For the regulators , the small trades need to go back to lit markets and that ’ s what they ’ re focusing on ,” added Charlotte Decuyper , consultant at Redlap Consulting .
Less contentious among the amendments are the changes made by European regulators to its data policies under MiFID and MiFIR regulation . The European Commission and ESMA have also set out plans for the implementation of a single provider of a near-real time consolidated tape for each asset class where there will be an obligation for venues to contribute their data directly to the selected providers .
“ For the European exchanges it ’ s a strong position that they take when they say it ’ s bad for the market when you dilute on book liquidity and dilute the reference price but that argument goes away quite quickly with a consolidated tape ,” said Baugh . “ I think if you ’ re a European exchange , it ’ s maybe a bittersweet outcome .”
ESMA and the European Commission have
“ I think that some of the market practitioners were sort of hoping , naively or otherwise that there wouldn ’ t be so much divergence so quickly , but I think now that ship has sailed and I think we ’ re definitely seeing that happen ”
JAMES BAUGH , HEAD OF EUROPEAN - AN MARKET STRUCTURE , COWEN also made plans to scrap RTS 27 reporting in a bid to overhaul best execution metrics by refocusing them on price including explicit and implicit cost .
They also include making changes to scrap the Open Access regime meaning clearinghouses in the EU will no longer be obliged to clear derivatives trades that are not executed on their vertically integrated platform .
Changes to the share trading obligation The changes also make amendments to the share trading obligation to only include European Economic Area ( EEA ) ISINS and align the derivatives trading obligation ( DO ) with the clearing obligation ( CO ) for derivatives under EMIR . Alongside this the regulator has moved
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