MiFID and MiFIR Review

As stated by the European Commission, the priorities for the MiFID/R review are "to improve transparency and availability of market data, improve the level-playing field between execution venues, and ensure that EU market infrastructures can remain competitive at international level”. To achieve this, there must be a diverse and sound trading landscape, enabling investors to select between various execution venues and market models in an environment where price formation and market integrity are protected. In the new macroeconomic normal, dominated by inflation and high interest rates, the need for strong market-based financing versus increasingly constrained bank-based financing is paramount. To achieve this, we need an investment and trading environment that can be trusted by all market participants, enables an efficient allocation of capital via robust price formation and provides open and fair competition for all participants.

European stock exchanges have invested significant resources to play their major role in financing the real economy and in fostering listing and SME financing. They support European countries in building robust financial markets, promoting strong financial industries and attracting international investments to truly service local economies. Exchanges are the venue of reference for price formation and price improvement, even more significantly when volatility hits the markets. Thank to their continuous investments and innovation, stock exchanges support fair and orderly trading to benefit of the whole ecosystem. They have been able to adapt and innovate to meet the needs of their various clients, from issuers to final investors and to the broader economy as a whole.

Euronext remains strongly committed to building the backbone of the Capital Markets Union. This is why we believe it is of paramount importance to ensure that the MiFID/R Review reinforces the competitiveness of EU markets. The outcome of the MiFID/R Review in this respect will define whether the EU has an ambition to be a continent of finance-makers, or accepts to be merely a territory of finance-takers. There are three key issues at the heart of the Review that require particular scrutiny: the establishment of a Consolidated Tape (CT) that brings true value to market participants; a ban on Payment for Order Flow (PFOF) to ensure retail investors get the best services by preventing conflicts of interest, and better balancing of lit and dark trading, meaning that Systematic Internalisers (SIs) are placed under proper regulatory oversight.

Supporting Consolidated Tapes that improve competitiveness of EU markets.

The primary objectives of the CT set by the Commission in the initial proposal, were to improve transparency and reduce market fragmentation.

There is a strong case for the creation of Consolidated Tapes on non-equity markets – namely a Consolidated Tape for bond markets and a Consolidated Tape for ETF markets - which will foster broader participation into these asset classes across European markets.

Turning to equities, the position of the Council, that was already a step further from the initial European Commission proposal, would allow the dissemination of information in real time on transactions in equities across all EU venues, together with the prices available on the markets at the time of their execution. It would give all European market participants (issuers, retail and institutional investors and intermediaries alike) easily accessible consolidated information on the overall liquidity available across European markets, supporting all non-trading use cases, including best execution analytics, in flight analysis and portfolio valuation. As such, it would be a powerful tool to support the Capital Market Union, by equipping participants with the information necessary to take investment and trading decisions on EU listed equities as well as to operate core middle- and back-office functions.

In contrast, the trading tape proposed by the European Parliament, would inevitably distort the market. From a market structure standpoint, the Parliament’s proposal for a real-time pre-trade tape with five levels of depth would drive trades away from lit markets, by supporting more dark trading at the tape’s pre-trade reference price. It would facilitate the arbitraging to the detriment of retail investors, thereby increasing market fragmentation and enabling unfair treatment of market participants depending on their level of sophistication. Looking at the concrete outcome of the main live example to date – the US tape, a trading tape  basically favours non-transparent markets and non-transparent trading. That's because the real-time pre-trade tape becomes a reference price, that can be easily imported by dark pools to allow trading away from lit markets. From an operational standpoint, it would be complex and costly to set up from scratch. As a result, established players already active in the space, have a huge advantage, from a capabilities, costs and risks standpoint to win and operate such a tape vs non data vendors. Therefore, the participants supporting the European Parliament’s proposed tape are advocating for a regulation that would be to the detriment of European public capital markets and the exchange infrastructure that supports them, as well as in direct contradiction to the original policy aim of increasing transparency.

That is why Euronext has advocated for a tape that brings true value to European capital markets and contributes to the development of the Capital Markets Union. We believe the Council text can, and should, present a compromise based on the notion of a real-time post-trade tape, supplemented with a snapshot of pre-trade information from the point of execution. Only this solution would improve the competitiveness and transparency of EU financial markets, to the benefit of all EU and global investors, from individual retail investors to large asset managers, without distorting the market and giving disproportionate advantage to a small group of major market participants.

A full ban on Payment for Order Flow.

Sustained investor participation in European financial markets is critical to having an environment that can be trusted by all participants. PFOF hinders retail investors as it de facto entails conflicts of interests which are particularly acute for retail investors who naturally suffer from information asymmetries versus professional market participants. It is therefore intrinsically contradictory to the objective of financial markets providing fair treatment to all participants. With PFOF models, the broker will always have an economic incentive to direct order flow to the execution venue or counterparty that offers the highest payment or discount, and not necessarily the best outcome for its clients.

In addition to the issue PFOF raises when it comes to the protection of individual investors, it has also more structural impacts on market structure. First, by undermining market fairness, it risks ultimately decreasing retail investors’ trust and hence participation in financial markets. In addition, the use of PFOF, because it mechanically equates to the privatisation of retail flow execution  - which is no longer executed on lit and multilateral venues but under private deals - also results in a less transparent and less efficient price formation mechanism. PFOF therefore negatively distorts competition and the overall functioning of capital markets.

This is why we believe that a full ban on PFOF is the only way to ensure retail investors are protected and to support well-functioning capital markets.

Promoting a level playing field for Systematic Internalisers.

SIs need proper regulatory oversight in order to maintain a balance between lit and dark trading that is fair for investors, maintains market integrity and prevents market abuse and fair competition.

SIs enable to execute flow away from multilateral and lit venues onto purely bilateral venues where client orders are being matched against the proprietary capital of the SI operator. They were initially designed to provide an execution alternative, notably to execute large trades that required bespoke liquidity. By construction, SIs do not contribute to price formation and de facto privatise flow execution.  They have become an integral part of the diverse European trading landscape yet protecting price formation and market integrity across European markets require SIs to operate on a level playing field with other execution venues.

This is why we believe that the requirements applicable to SIs be brought at par with those already applicable to other execution venues in the EU and that the exemptions allowed to SIs to trade away from displayed prices (i.e., midpoint trading) be limited only to legitimate circumstances (large orders), as per the initial European Commission’s proposal. If the European Commission, Council and Parliament fail to retain the Commission’s original proposals, there is a risk that the amended proposals will result in less transparency, more fragmentation, more bilateral trading (to the detriment of the end investor) and will hinder progress towards the Capital Markets Union.