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Industry butts heads over MiFID II SI tick size regime

February 12, 2018

Major exchange operators across Europe have urged EU financial authorities to ensure systematic internalisers (SIs) under MiFID II are subject to the tick size regime.

In November, the European Securities Markets Authority (ESMA) proposed enforcing the tick size rules to the SI regime in a bid to level the playing field for trading on-exchange.

It stated a competitive disadvantage would be created for trading venues if only on-venue orders and quotes have to comply with the minimum tick size regime, resulting in volumes currently traded on-exchange migrating towards over the counter (OTC) execution.

The London Stock Exchange Group (LSEG), Cboe Europe, Nasdaq, Aquis Exchange, and Bolsas y Mercados Españoles (BME) were among the exchanges calling on ESMA to enforce the tick size regime on SIs in responses to the consultation published this week.

Exchanges argued that SIs can provide price improvements which could divert routing of client order towards SIs rather than on-exchange venues, leading to a competitive advantage. 

Aquis Exchange warned that failure to implement the tick size regime will create an unlevel playing field, as SIs are not accessible to all market participants.

The exchange added it is ‘detrimental’ to MiFID II’s best execution requirements as SIs have ‘marginal price improvement’ that trading venues are not able to match. 

“As these trades are conducted bilaterally with the SI, and the SI can choose which counterparty they wish to trade with, it would result in the fact that other market participants will not be able to achieve ‘best execution’,” Aquis said in its response.

LSEG concurred that SIs should be subject to the same tick size regime as trading venues including half-ticks to allow mid-price trading as available on trading venues.

The Group also noted the ‘inconsistency’ of the tick size regime between execution venues would result in an unintended unfair advantage for SIs, but amendments to address this would ensure a fair application of the regulations.

Furthermore, ESMA proposed the tick size regime be implemented to SIs below standard market size (SMS), but Nasdaq stated there are similar arguments that the tick size regime for SIs should also be extended above SMS.

“Whereas the proposed change is both useful and justified, and should be implemented, it will only apply to orders up to the SMS,” Nasdaq said in its response. “Nasdaq believes that arguments justifying the application of the same tick size regime to trading venues and systematic internalisers up to the SMS are also relevant for sizes above the SMS.”

Bigger picture

The concerns raised by exchange operators and the debate around the tick size regime are just a small detail of the wider regime, according to Anish Puaar, market structure analyst in Europe at Rosenblatt Securities.

“The tick size regime for SIs is an interesting debate, but it’s only one detail of the wider regulations,” Puaar told The TRADE. “It scratches the surface on what the buy-side need to get to grips with when it comes to dealing with SIs and I think it will take a while for the buy-side to be comfortable using them.  

“SIs currently have the opportunity to quote at finer increments than other venues. This could allow SIs to attract orders away from exchanges, which some worry may harm price formation.”

Virtu Financial – which operates an SI within Europe through its division in Dublin –fought back against ESMA’s proposed amendments, instead advocating that the EU markets watchdog address escalating costs imposed by trading venues. 

“Escalating costs are having immediate and profoundly negative effects on the availability of liquidity and on price formation in the European Union,” Virtu Financial said in its response.

“These increasing costs are evident across all areas of the trading lifecycle, from market data, connectivity, trade execution, co-location and access, through to clearing and settlement.”

Major organisations have urged financial regulators globally to address increasing fees charged by exchanges to market participants in terms of the collection, distribution and sale of equity market data.

On December 24 last year institutions including Bloomberg, Citadel Securities, Fidelity Investments, the Investors Exchange (IEX), Morgan Stanley, T. Rowe Price, UBS and Virtu Financial brought the issue to the US financial regulator in the form of a petition.

The petition pressed the Securities and Exchange Commission to conduct a thorough review of the equity market data fee structure with the aim of introducing rules around disclosure of fees.

Similarly, the European Savings and Retail Banking Group (ESBG) pressured ESMA to review market data pricing in its response to the SI consultation, to ensure any amendments do not result in additional charges to data users.

“Trading venues will most likely exploit requirements to mirror prices on trading venues to introduce additional payments on market data,” ESBG stated.

“But, if ESMA escalate its focus on reasonable market data pricing by ensuring that the proposed change will not imply additional charges on date users and that the tick size regime only apply up to standard market size, ESBG can accept the amendment.”

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