THETRADETECH DAILY THE OFFICIAL NEWSPAPER OF TRADETECH 2023
regions . The UK effectively banned the practice a few years ago , while European regulators have been toying with some level of ban for well over a year now . Despite the draft regulation proposed by the Czechs in December including a restriction on PFOF , leaving it at the “ discretion ” of Member States to allow the practice in their territory should they wish , the text approved for Trilogue this month includes a complete ban across the EU . The Council has included the option for exceptions by individual member states , who can decide to opt out on behalf of their own domiciled investors , should they wish – although The TRADETech Daily understands that the Parliament and Commission have not yet accommodated that option , which will be further discussed in Trilogue .
A consistent , region-wide approach would come as a relief to the many that argue Europe is fragmented enough without region-by-region regulation to navigate . But the outcome is by no means certain .
“ It ’ s going to be a debate . We know that for sure ,” revealed Rivard . “ To be honest , there were a number of late amendments by deputies to challenge the ban .”
One stone left unturned by the most recent text , however , is the concept of single venue market makers .
“ Whilst a comprehensive EU wide ban on PFOF does help create a needed level playing field , opening up single market maker venues to competition is still needed to help brokers achieve the best possible price for retail orders ,” Optiver ’ s public affairs manager , Tarek Tranberg , told The TRADE . “ Without that step , banning PFOF may only be a wealth transfer from brokers to single venue market makers .”
Dark trading While regulators on either side of the channel would appear to be converging on PFOF , there remain a few key areas where both regions appear to be pulling in different directions following Brexit . Namely , the level of transparency in the markets when trading and how large a portion of volumes should be forced to take place on the lit markets .
Participants were quick to voice their wariness and disappointment over the potential limitations or “ simplification ” of the double volume cap ( DVC ) mechanism approved in February – in particular the potential creation of a minimum order size for the reference price waiver to restrict midpoint trading and to push smaller trades back onto the lit markets .
The Trilogue is expected to review the question of midpoint trading – particularly with regards to systematic internalisers ( SIs ) and how they are treated - when it launches on 18 April . “ This is probably a slightly less controversial topic than consoldiated tape and PFOF , but it ’ s still a big deal ,” says Rivard .
“ The initial text of the Commission basically prevented midpoint trading for smaller orders ,” he explained . “ The Council approach is very different , it basically makes trading at midpoint possible , while the Parliament text is in the middle . By definition , this can ’ t take place on a lit market , so from our perspective there is certainly an argument to have some sort of definition and / or limitation to ensure a level playing field .”
Numerous proposals have been put forward , from the original Hübner report ranging from a 10 % DVC suggested by the most recently Czech-led Council , to a 7 % DVC suggested by Parliament . The recent February vote in favour of the Hübner report suggests the power should be with ESMA to define what the right minimum threshold should be in the dark and on SIs , suggesting a more evidenced-based approach to setting Mifir regulation .
In a statement following the vote , Cboe Europe said it “ remains concerned that any such minimum size is likely to prove damaging to EU liquidity and to the competitiveness of EU investment firms , and undermine execution quality for investors , but cautiously welcomes that ESMA is mandated to consider these factors and rely on empirical evidence to support any such recommendation .”
In a bid to foster new interest in its markets following the loss of share trading post-Brexit , the UK has taken a contrasting stance , instead favouring an outright removal of the DVCs and no restrictions on systematic internalisers as part of its Wholesale Markets Review ( WMR ).
There remain some unavoidable areas of divergence – for example , it ’ s now almost a guarantee that no equivalence decision will be reached on the share trading obligation ( STO ). Further afield in the world of post-trade , Europe is now intent on reclaiming a chunk of clearing as seen by the lack of permanent equivalence awarded to UK-based CCPs , and its announcement in December that relevant participants will be required to hold active accounts at European CCPs for clearing at least a portion of certain derivative contracts . With regards to dark trading , the markets will have to wait and see what comes out of Trilogue but whatever the result , it won ’ t mirror the UK ’ s removal of DVCs .
Where next ? It ’ s not all doom and gloom . A pre- and posttrade tape could well be on its way and while continued restrictions on dark trading are likely in Europe , they may not be as rigid as was first thought in 2021 . The approach to Mifid II in the UK and Europe overall is heading in a more collaborative direction that it was in the months that followed the Brexit bell and the exodus of share trading seen by the UK following the lack of equivalence .
Now that Trilogue is underway , we could realistically expect to see results published by summer , followed by publication of the final text , with application potentially as early as the 2024 .
It might not be perfect , but it ’ s progress .
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