New Trading Rules Ahead for Europe

Terry Flanagan

European lawmakers have agreed revisions to the Markets in Financial Instruments Directive governing trading in the region which include limits on dark pool trading and new rules on algorithmic trading.

The Association for Financial Markets in Europe, a trade group, said in a statement that the agreement yesterday on MiFID is a major step towards ending regulatory uncertainty while supporting the ability of Europe’s financial markets to meet the needs of investors and issuers.

The statement said: “However the agreed text falls short in certain areas, such as the curtailment of execution options for equity investors and the limitations on competition and choice between clearing houses and trading venues.”

The AFME also said the double cap restrictions on the use of equities trading waivers will present significant operational challenges as the new rules are developed.

Last year the European Council agreed to impose a cap of 8% on the total consolidated amount traded in any stock during a trading day in dark pools and 4% of total trading per stock on a single dark venue in order to improve price transparency and encourage trading on lit exchanges.

Commissioner Michel Barnier said in a statement that MiFID II will ensure that legislation keeps pace with technological developments.

“The dramatic increase in the speed and volumes of order flows can pose systemic risks,” Barnier added. “The new rules ensure safe and orderly markets and financial stability through the introduction of trading controls, an appropriate liquidity provision obligation for high-frequency traders pursuing market-making strategies and by regulating the provision of direct electronic market access.”

Remco Lenterman, managing director, IMC Financial Markets, and chairman of FIA European Principal Traders Association said in a tweet: “We support the EU’s regulation of all forms of trading through MiFID II, including HFT and algorithmic trading.”

New controls for algorithmic trading include the requirement for all algorithmic traders to be properly regulated and to provide liquidity when pursuing a market-making strategy. In addition, investment firms providing direct electronic access to a trading venue will be required to have systems and risk controls to prevent trading that may contribute to a disorderly market or market abuse.

The MiFID II rules also state that organised trading of financial instruments must shift to multilateral and well-regulated trading platforms and introduce a new multilateral trading venue, the Organised Trading Facility (OTF), for non-equity instruments.

“Strict transparency rules will ensure that dark trading of shares and other equity instruments which undermine efficient and fair price formation will no longer be allowed,” added Barnier. “Although I regret that the Commission’s proposed ambitious transparency regime for non-equity instruments, such as bonds and derivatives, has not been fully achieved, MiFID II represents an important step in the right direction towards greater transparency in this area.”

In addition the rules will introduce harmonised EU position limits in commodity derivatives which Barnier  said would curb speculation on and the impacts of rising food prices on the world’s poorest populations.

Barnier said the the new rules are a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the financial crisis but the Commission would have preferred a more ambitious implementation period.

The rules needs to be approved by the European assembly and national governments to be implemented. The agreement on the primary legislative texts has taken more than two years since the Commission’s proposals were first published.

There are likely to be nearly 90 subsequent secondary measures including conditions for deferred post-trade transparency for non-equity instruments; conditions for a trading venue to deny or grant access and the data standards and formats for a consolidated tape.

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