Last month the European parliament approved MiFID II, an ambitious piece of EU law, which will have meaningful implications on how shares are traded, cleared and reported. We aim to provide some insight on developing issues, with particular reference for Investor Relations teams around the world.
Since its implementation in 2007, MiFID has been the most significant piece of regulation shaping capital markets across Europe. The goal was to reinforce the European financial market and harmonise regulations by enhancing marketing transparency and improving investor protection. MiFID has provided the framework for the rise of ‘multilateral trading facilities’ (MTFs) and other alternative trading venues, which collectively narrowed spreads and decreased fees for investors. Today anywhere between a third and half of trading of European large cap companies happens off-exchanges and on MTFs. Consultancies predict that a further 5-15% of trading happens on Dark Pools and Crossing networks (explained below).
Why is it being revised & what exactly is MiFID II?
Following the implementation of MiFID I, few could have predicted the rapid rise in algorithmic and high-frequency trading (HFT). Unintended consequences of this have included a much more divided (across venues) trading landscape and migration to so-called ‘dark pools’, which help conceal volumes and identity of traders. Regulators also worry that demand-supply dynamics are distorted: dark pools move trading increasingly away from exchanges, despite the prices remaining inextricably linked (dark pool transactions settle at mid point of bid/ask from exchanges). Other instruments, most notably derivatives (contracts which draw value from underlying assets) have been largely neglected in MiFID I.
MiFID II will target transparency for pre- and post- trade of equities, ETFs, bonds and derivatives as well as seek further investor protection through a number of measures including the alteration of market structures. All asset classes will now be subject to open and transparent trading – not just equities targeted by MiFID I. The proposed MiFID II seeks to ban brokers’ crossing networks in an attempt to force trades onto ‘lit’ exchanges. Caps will be placed on dark liquidity volumes. ESMA has estimated that 20% of European trades by value are algorithmic/high-frequency and traders will now be forced to register their proprietary formulae with regulators. Post-trade data sold by exchanges are also under review in an attempt to promote accessible transparency. Clearing houses will be allowed to process trades for multiple exchanges through the ‘open access’ regulation encouraging competition in the derivatives market.
So to summarise we can expect:
Dark Pool caps
High-Frequency Trading rules
Data Fee rules for exchanges
‘Open access’ regulation for clearing houses
The alternative venues in a little more detail
Multilateral Trading Facility (MTF): A European regulatory term for a non-exchange financial trading venue. Typically these are electronic, and allow trading of exotic products where no exchange exists. MTFs compete with exchanges on technology, lower cost base, and trading incentives for brokers. Example of this is ‘maker/taker pricing’; ie paying brokers to trade on platform as long as the trade adds liquidity rather than take it away liquidity and price. Examples: BATS Chi-X Europe, Turquoise
Crossing network: A non-exchange electronic matching mechanism for buy/sell orders connecting brokers and dealers without the need for a public exchange (not anonymous). Examples: Liquidnet, Pipeline
Dark Pools: Private off-exchange financial trading venues often used by institutional investors with large orders who want to hide their order size (anonymous). Examples: Goldman Sachs’s Sigma X, Credit Suisse’s Crossfinder
How can I find out where my shares are traded?
All major financial data platforms will have screens, which try give you this information. There are also a number of free sources online to your disposal. One of our favourite is Fragulator. Below is are two screen we ran for Vodafone’s Ordinary Share:
Will MiFID II impact everyone or just European companies?
MiFID is specifically designed for European implementation and thus will only directly affect European capital markets. However the regulation will impact any global issuer who has a share listing in Europe or a Depositary Receipt programme listed or quoted in London, Frankfurt or Luxembourg.
What are good resources to keep up to date with developments?
There are plenty of interesting sources online. Some of our favourites are:
FT's Markets and Regulation section
PWC European Financial Regulation Updates page
ESMA Consultation Paper on MIFID 2
E-financial News Trading and Technology
Check list for Investor Relations Teams
1. Do I have a solid understanding of where my shares are listed, quoted, and traded? Do I roughly know the average daily trading volumes in each venue?
2. Do I have a one-page management report on the subject ready in case I am asked for it?
3. Am I working enough with my advisors and counter-parties to try to understand who is behind those trades? Am I connected with those investors on Closir?
4. Am I aware of the three alternative ‘venues’ where trading of my securities can take place?
5. Am I clear as to why the original MiFID has been revised?
If the answer is still no to any of the above, that’s OK, we are here to help. Just send us a note and we will find a time to go over all of this with you.