European Exchanges In Market Abuse Warning

Terry Flanagan

Many of Europe’s leading exchanges are concerned that regulators are not doing enough on the issue of market fragmentation and warn that abuses could be occurring on the region’s bourses.

The Federation of European Securities Exchanges, which lobbies on behalf of 46 of the region’s exchanges, said the fragmentation of trading across multiple venues was making it harder for investors to assess whether prices were being formed fairly and transparently.

“We believe the method of effective detection of market abuse must be urgently addressed,” said FESE in a recent comment letter to the European Commission on its proposed revisions to the Market Abuse Directive.

“Fragmentation has resulted in no single venue having immediate complete oversight of all activity in any given financial instrument. Therefore it is possible that potential abuses may be occurring which may not necessarily be evident to any single venue when it looks solely at the activity conducted on its platform.”

The implementation across the European Union of the 2007 Markets in Financial Instruments Directive (MiFID) paved the way for competition among the region’s bourses and sparked this move towards greater fragmentation. A host of alternative trading venues—such as Chi-X Europe, Turquoise and BATS Europe—sprang up, challenging the dominance of the incumbent exchanges.

Exchanges currently monitor their own trading activity while European regulators can co-operate over market abuse cases and the monitoring of transactions. However, there is no cross-border surveillance to monitor trading activity that can encompass multiple platforms.

Some more liquid stocks are traded on as many as 30 venues and the growth of over-the-counter markets and dark pools have seen the percentage of equity trades on the region’s incumbent bourses—such as the London Stock Exchange, NYSE Euronext and Deutsche Börse—shrink substantially over the past few years.

“The unintended consequences of MiFID resulted in the appearance of gaps in exchange surveillance data and additional challenges in the ability of individual venue operators to effectively safeguard market integrity with any certainty,” said FESE.

“Furthermore, new venues established by MiFID should be able to deliver the same levels of protection and devote the same level of market surveillance as regulated markets and provide suitable support infrastructure to ensure market integrity, even if the venue is relatively small.

“Given that market abuse could happen irrespective of the size of market, the absence of equal surveillance and enforcement obligations in support of market abuse creates a loophole for potential abuses to occur.”

FESE also recommends that the plethora of European financial services regulations set to come into force should also be adjusted to be in line with one and other.

“We strongly believe that the provisions of the Market Abuse Directive should be aligned with other legislation with which it might overlap—for example, EMIR [European Market Infrastructure Regulation], RCSD [Regulation on Central Securities Depositories] and MiFID—and avoid any uncertainties or arbitrage among market participants and trading venues,” added FESE.

In October last year, the European Commission set out proposals to update and strengthen the original 2003 Market Abuse Directive on insider dealing and market manipulation due to the increasingly complex and global nature of trading platforms. The proposal has now passed to the European Parliament and Council of Ministers for negotiation and adoption. The Commission is seeking to enforce criminal sanctions for certain offenses. It is expected to come into force in October 2013.

At the same time, the Commission also announced plans to revise the original MiFID directive.

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