The recently proposed cap on European dark trading has caused quite a stir. It also illustrates how MiFID II policy-making has descended into almost Eurovision song contest levels of farce.
The basic idea is to put a cap (currently proposed at 8%) on the level of trading that occurs away from lit markets. The rationale for this is to protect the regulator’s precious price formation process and so it sensibly excludes large block orders that wouldn’t have traded on an exchange anyway. But, bizarrely, the current proposal is for an absolute limit regardless of whether trading off exchange might actually result in a better outcome for the end investor. A quick look at the FTSE 100 shows that over the past 12 months only 5% of its constituents would have breached this limit and, according to the new rules, would be forced to trade exclusively on lit markets for the next 6 months. But you need to add into this total other MiFID II proposals that will include broker crossing networks and negotiated trades in the dark tally. Taking modest estimates for just negotiated trades, you very quickly get to something like 20% of the FTSE 100 now being sent to the naughty corner. This looks like having a pretty fundamental impact on brokers’ workflow and that they will bear the brunt of the consequences (intended or otherwise).
You would have thought that something as important as this would be approached seriously but, no, this is Europe. So, six years after the original MiFID implementation, we still have three as yet unreconciled versions of the new MiFID II text and face the possibility that the Council of the European Union might even ignore all these and go another way entirely. On top of this, the dark pool dilemma described above is part of a bigger fight going on between the UK and Germany over the future direction of derivatives clearing in Europe. But relax, don’t worry, as next month the Council presidency passes to – wait for it… Lithuania. Well that’s sure to get everything sorted then.
At least I can choose to switch off the Eurovision song contest, just wish I could afford to do the same with MiFID II.
The base for regulation was to create efficiency and competition. We do now have competition in execution services, but the incumbent still have monopoly in market data and in being the reference for closing/mid price and other linkage to other products. The introductions of new exchange fees for market data and other creative connection fees etc. show endless in using their monopoly situation when the revenues from execution are falling. Regulation should focus in how to get a free reference price and unbundle all products from linkage to the primary. Another option is to make the exchange member or state owned. A private monopoly is never efficient for the customers. Why is the primary exchange the only accepted price mechanism? Or this is happening already? New price mechanisms – and trading in the dark! And this limit of dark trading volumes is the last desperate move from the exchange lobby?
Interesting to follow, but still a farce.