Brussels in late effort to tighten rules limitng off-exchange trading
European Commission seeks to limit trading on dark pools by closing loophole
Brussels is making a late attempt to shut a loophole in new share trading rules that authorities fear could be used by some banks and proprietary traders to conduct more business away from public stock exchanges.
The European Commission published a proposal late on Tuesday to tighten its definition for investment firms that transact customers’ deals on their own account, fewer than 200 days before the rules are due to come into effect at the start of 2018.
Its late intervention to change the Mifid II markets legislation marks a renewed effort to prevent what regulators fear is a plan to circumvent new rules designed to bring most off-exchange share trading back on to stock markets.
Although the rules have been more than six years in the preparation, policymakers have in recent months become concerned some banks and high-frequency traders will take advantage of what Brussels on Tuesday described as “an ambiguity” in the wording of the new rules.
They have raised concerns some banks and high-frequency traders will create private electronic networks to trade shares. That would run counter to the spirit of Mifid II, which is designed to push most off-exchange business away from so-called dark pools and bank trading desks.
The arcane point has become a divisive one in the industry. Some banks and high-frequency traders have spent months and millions of pounds preparing new technology for the rules and described regulatory tinkering as trying to solve a “problem that doesn’t exist.”
Brussels said on Tuesday its late proposal was “in light of alleged nascent industry initiatives”. It wants to use a fast-track legislative process known as an delegated act to amend its definition of “systematic internaliser”(SI), the legal bracketing for these investment companies.
The status grants exemptions from rules on minimum quoting and trading increments — or tick sizes — that encompass exchanges. Standards on trade reporting are also eased. Many banks, proprietary high-frequency traders and electronic market makers are expected to convert their legal status to an SI.
The Commission’s proposed definition is seeking to ensure that designated companies do not conduct “riskless” business in which they immediately offload business that they take on to their accounts. An underlying principle of the status is the company’s investment capital is at risk.
But lawyers pointed out that the new proposals still lacked clarity, especially over the length of time in which it could be argued the investment firm’s capital was at risk. Privately, some high-frequency traders planning to convert to an SI said the new definition would not change their approach.
Brussels’ new proposals come less than three months since the European Securities and Markets Authority issued guidelines to the trading rules in an effort to fend off what it saw as “potential loopholes”. The short timeframe available meant Esma turned to resolving the issue by publishing a series of technical documents.
Market participants will have four weeks to respond to the commission’s proposals.