26 March 2014

The Trade: ESMA warned not to use tick sizes to control market

As part of MiFID II, ESMA is set to look at formalising a tick size regime for Europe, but some industry experts are concerned it could be pressured into using tick sizes as a way of controlling HFT flow.

“There has been a strong desire by some regulators and politicians to introduce a minimum tick size regime to control high-frequency traders", said Mark Spanbroek, vice president of the Futures Industry Association European Principal Traders Association (FIA EPTA), which represents high-frequency traders. “The French regulator in particular has been keen on this idea so we need to make sure, as an industry, that a rigid regime is not introduced as part of MiFID as this could be damaging for markets.”

Currently, tick sizes in Europe are set by the Federation of European Stock Exchanges (FESE). It produces a series of FESE tables, which set out tick sizes for certain types of stock and different venues based on their liquidity, though exchanges accept these could be improved to provide a more coherent regime across Europe.

"There is a desire to have a single tick size table that covers the full range of stocks, from the very small to large-cap, with tick sizes that match their liquidity profiles. This is really just about common sense to make sure we have tick size regimes that ensure there is adequate liquidity", explained BATS Chi-X Europe CEO, Mark Hemsley. He said the introduction of a more formalised tick-size regime could help improve liquidity, particulary for small- and mid-cap companies, but warned that politicians should not use them as a blunt instrument to manipulate the market. "Some have viewed this as a way to impinge on HFT activity, but it should be about market liquidity rather than trying to control the behaviour of a particular type of market participant."

Of particular concern is the impact that an overly-harsh tick size regime could have on end investors. Spanbroek said: “Increased tick sizes will widen spreads, and if you speak to pension funds and insurers, they don’t want this because it will push up their costs to trade and ultimately it’s their clients who will feel the impact on their investments.”

A move to widen tick sizes might also encourage other activities that MiFID II is seeking to combat, making it vital for ESMA to consider the effects a tick size regime could have across the industry, according to Hemsley. "I expect ESMA to consult widely on this and look at the market holistically", he said. “Overly-wide tick sizes could potentially increase dark trading as you would get greater price improvement, which would go against some of MiFID's other goals, so a lot of work needs to be done to ensure the industry and regulator get this right."

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