Proposed changes to the MiFIR Review miss their targets, to the detriment of investors, EU-global competitiveness, and the capacity of EU markets to finance the green and digital transitions
There is widespread consensus among EU policymakers that market
fragmentation and opacity are harming the efficiency of EU markets.[i]
However, amid intense discussions over PFOF compromises and the
consolidated tape in the MiFIR review negotiations, the organisation of
EU equity markets – what should be at the core of the planned reforms –
is not getting much attention. Worse, some of the latest proposals in
this area risk cementing fragmentation and opacity, to the detriment of
investors and EU-global competitiveness.
Therefore, FESE is calling on policymakers not to lose sight of their
overall objectives: increased transparency, visibility, and liquidity,
and a level playing field between trading and execution venues.
The MiFID II/R framework was designed in the aftermath of the
financial crisis with a view to strengthening transparency, price
formation, investor protection, and investor access to EU markets.
Although some improvements have been achieved, complexity and
fragmentation have intensified, with more than 250 equity venues
currently in operation. Systematic internalisers (SIs) have especially
prospered, accounting for 27% of European flows by June 2022, while lit
primary activity hit an all-time low of 28% – almost half its 2017,
pre-MiFID II peak of 53%.[ii]
Current levels of dark trading are far above the threshold that academic research recommends.[iii]
At such levels, dark mechanisms are detrimental to the quality of
trading, harming the functioning of EU financial markets and diminishing
the depth of liquidity. If the EU continues on this trajectory, it
threatens the viability of its capital markets to finance the digital
and sustainable transition.
SI trading should be limited to what it was intended for: trading in
large sizes. A single volume cap, replacing the existing double volume
cap mechanism, should be introduced to limit the total EU volume of all
non-pre-trade transparent trading, with ESMA responsible for setting the
threshold.
Regrettably, however, in a perceived bid to remain competitive, the
EU seems keen to embrace the deregulatory agenda in equity of the UK’s
Wholesale Markets Review. Such changes would be short-sighted: the UK is
in the same position as the EU, of declining global importance as our
collective share of global market capitalisation falls. In global
capital markets, the benchmark is the US and Asia. For the EU to
position itself globally, as a genuine player in capital markets, the
Capital Markets Union needs to provide a transparent, well-functioning
and stable market that investors can trust.
Petr Koblic, the FESE President, commented:
If we in Europe are to realise our
ambitions, around sustainability, around shared prosperity, we need to
empower our capital markets to deliver and mobilise European investors.
For
this, we need a clean, simplified market structure – without
inducements or payment for order flow – in which a sensible balance
between lit and dark trading allows European equity markets to flourish.
Rainer Riess, Director General of FESE, added:
We fear that the current direction
of the MiFIR negotiations bypasses the core issue – EU market
structure. If policymakers do not adjust their focus, certain proposed
changes threaten to set back the prospect of a genuine CMU and
competitive EU capital markets.
In taking its lead from the UK,
and not the US, policymakers risk mirroring the wrong target. For EU
open strategic autonomy to succeed, Europe must take control of its own
destiny and not engage in a race to the bottom.
References
[i] https://www.oxera.com/insights/reports/primary-and-secondary-equity-markets-in-the-eu/
[ii] SI activity spike further damaging European intraday liquidity, report finds (thetradenews.com)
[iii] https://www.fca.org.uk/publications/occasional-papers/no-29-aggregate-market-quality-implications-dark-trading
FESE
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