Regulators should protect investor choice in the dark – TABB Group

Mizen: investors need choice

New regulations that will affect how banks run crossing networks for their buy-side clients should avoid constraining investor choice by forcing a ‘one-size-fits-all’ approach to trading, according to Miranda Mizen, senior consultant at TABB Group.

“We need variation in the means of execution,” she said. “The needs of one investor may be very different from that of another. We need a regulatory framework that permits innovation and the best interests of investors.”

In Europe, under the European Commission’s upcoming MiFID II legislation, broker crossing networks that currently provide discretionary pools of liquidity will be required either to become MTFs or systematic internalisers. The aim of the legislation is to improve transparency in equity markets and allay concerns that an ever-increasing amount of trading activity is taking place away from the lit exchanges – and away from the rules.

MTFs cannot favour different clients over each other, and must provide open and free access to all – though they can still use pricing structure to make their venues more or less attractive to different segments of market participant. Buy-side crossing network Liquidnet, for example, has a fee structure designed to make it relatively unattractive to high-frequency traders, and markets itself as a venue for long-term institutional investors. But proprietary broker crossing networks may still be affected adversely by the legislation, suggests Mizen.

“If BCNs have less discretion about how they operate – for example, by losing their discretion over how orders trade, so that they have to trade either at the mid-point or the quote but can’t trade in-between, then that’s cutting off avenues for the buy-side to trade in the dark,” she said. “There’s a worry that a strict regulatory framework will impact on the buy-side’s ability to trade difficult order flow.  This could end up undermining the ability of long-term institutional investment firms to achieve effective results to their end clients.”

Dark trading currently accounts for approximately 8.79 % of European equity market trading volume in November 2012, according to figures provided by Thomson Reuters. In September, of some 7,000 stocks analysed by TABB Group in the US, some 40% saw more than 40% of their volume traded off-exchange, according to Mizen.

Adding to the difficulty for European market participants, there is still no single widely-accepted view of the market.

In November, Mark Hemsley, chief executive at pan-European MTF BATS Chi-X Europe said that the original MiFID legislation of 2007 had failed to achieve its mission of a more efficient European equities market, because of the lack of a consolidated tape of post-trade data. In the US, post-trade data is provided in real-time as a public utility by the DTCC. Although several initiatives, including one by the COBA project and another by FIX Protocol, have set out possible solutions for Europe, there is still no clear resolution in sight. MiFID II does support the creation of a consolidated tape, but the draft document leaves it open to a public tender process, rather than setting a specific provider – a measure that has been met with disappointment in some circles.

“The tape is a huge indicator of what’s been happening in equity markets and what market participants should do next – it’s key element,” said Mizen. “The buy-side has been asking for a consolidated tape for five years now, and still we have nothing. It’s not a very satisfactory state of affairs.”

MiFID II, which is currently being negotiated between the European Parliament and the Council of Ministers, is expected to take effect in 2015 and 2016, according to the latest estimates from Kay Swinburne, MEP and member of the European Parliament’s ECON Committee.