The following highlights grabbed my attention;
With regard to Dark MTFs & BCNs, the report
- Explicitly acknowledges that BCNs are different to dark MTFs in that they are an extension of the ‘traditional, discretionary broker-client relationship’.
- Calls for BCNs to disclose to regulators the details of orders matched in the system (which is a significant volume of data), as well as information on the trading methodology, level of broker discretion, and methods of access.
- Calls for an investigation into whether there should be a volume threshold above which BCNs must convert into MTFs.
- Calls for an investigation into setting a minimum order size on BCNs and MTFs as a way of encouraging greater flow of trade to lit venues in the interests of price discovery. And, calls for a review to consider whether such a minimum size threshold be applied to the Reference Price waiver upon which dark midpoint MTFs are reliant (but which does not currently apply to BCNs).
- Calls for a consultation on whether market-making within BCNs should be permitted, or whether they should be restricted to the crossing of ‘buy side customer orders’.
- Calls for a review to consider reducing the current Large in Scale thresholds, and also to broaden the Reference Price waiver to allow matching anywhere in the spread (which could be intended to allow the waiver, including a potential minimum size threshold, to be applied to BCNs also).
With regard to HFT, Co-location and Sponsored Access, the report
- Blames the US May 6th ‘flash crash’ on the withdrawal of HFT liquidity, and suggests a study into whether ‘informal market makers’ receiving a ‘maker’ rebate should have formal liquidity provision obligations and supervision.
- Calls for HFT firms to be regulated to ensure they have robust risk controls in place, and for market operators to stress-test their systems and introduce volatility interrupts and circuit breakers so as to avoid a European ‘flash-crash’.
- Calls for an investigation into the true impact/contribution of HFT trading on other market users, particularly institutional investors.
- Calls for unregulated proprietary trading firms to execute into markets through regulated firms (currently, MiFID allows these firms to join exchanges and MTFs directly).
- Calls for ‘unfiltered sponsored access’ to be expressly prohibited and for the Commission to adopt IOSCO’s principles on sponsored access, relating to the contractual arrangements and respective responsibilities for risk controls & filters – including an obligation for the sponsoring firm to have ‘pre-trade filters’ in place (although it doesn’t address the role of MTFs/exchanges in implementing pre-trade filters on behalf of the sponsor).
- Calls for trading venues providing co-location themselves, or indirectly via third parties, to ensure their co-location arrangements provide equal latency to all co-located customers (which could drive an interesting intrusion by market operators into the commercial affairs of independent data-centre operators).
With regard to market data, the report
- Calls for CESR to clarify and tighten post-trade reporting standards to ensure greater consistency so as to better facilitate data consolidation.
- Calls for venues to unbundle pre and post-trade data so that post-trade data can be acquired (and consolidated) more cheaply.
- Calls for the establishment of a working group to ‘overcome the barriers’ to a European Consolidated Tape and establish a privately run system (without any taxpayer funding).
And on other miscellaneous topics, the report
- Calls for all ‘equity like’ instruments including ETFs and DRs to be captured in the scope of MiFID.
- Supports the extension of MiFID to derivative instruments
- Requests that the Council consider extending the MiFID per & post-trade transparency requirements to all non-equity instruments subject to significant secondary trading (including an explicit mention of government and corporate bonds, though no mention of FX).
- Suggests that regulators must have sufficient data to be able to ‘re-create the order book’ – so as to understand the market dynamic and participants’ involvement (similar to the SEC’s $4billion proposal for a ‘Consolidated Audit Trail’ to gather attributed (identifying the underlying end-client) order & trade data across all market venues).
- Suggests that ‘flash orders’ that undermine the equal treatment of all exchange/MTF customers be banned (although it is not clear whether the routing services offered by Chi-x and BATS, and delivered via relationships with selected market participants, are intended to be captured by this).
A great deal of thought (and I suspect lobbying) has gone into this report, and the challenges now will be;
- To prioritise amongst the many recommendations to identify those that best promote competition and safeguard the efficiency and integrity of our markets, and to determine how much can be done and how quickly.
- To conduct the multiple investigations, consultations and reviews in an efficient and transparent fashion, ensuring that all the relevant parties have sufficient opportunity to contribute.
- To address the many inter-related issues in a holistic manner, without unintentionally advantaging or disadvantaging different categories of market participant through the uneven introduction of new rules.
I’ll return to many of these topics in future posts (although they will likely be every few weeks going forward).
