Concern is mounting that the rules, which take effect from next January, could be exploited by some banks and high-frequency traders (HTF), to sidestep policymakers’ determination to make share trading more transparent.
In an effort to improve trading transparency, the forthcoming MiFID II legislation will recognise investment firms that match customers’ orders via their own trading desks as “systematic internalisers”. This term refers to investment firms that transact shares for themselves and not for their clients.
While there are fewer than 10 systematic internalisers in Europe, their ranks are set to expand, bolstered by banks and also HFT firms, with the risk that more share trading ultimately occurs in private venues and away from public exchanges.
“We expect there will be significantly more [banks] getting ready for MiFID II,” says Mark Hemsley, chief executive of Bats Europe, the region’s largest equity exchange. “But it may also be attractive to other parts of the market.’’
The European Securities and Markets Authority (ESMA), the pan-European markets regulator, has expressed concern that some large high-frequency traders could also apply to be a systematic internaliser.
Recently the regulator wrote to Brussels with the blunt warning that the rules could be “circumvented” by banks offering to trade with only a favoured few clients, especially HFT companies. Members of the network could support the arrangements with agreements to supply trading flow, reinforcing the trend of so-called dark pool transactions.
Already, about half of the European market is traded away from order books run by exchanges, according to data from trading technology company Fidessa, although the number is clouded by exchanges’ differing definitions.
That scale of equity trading away from public exchanges via dark pools or through banks’ own internal trading desks, has prompted regulators to push against that growing trend. But their efforts are potentially seen as backfiring and reducing the quality of public markets, hurting investors. [...]
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