Fireside Friday… with RBC’s Hayley McDowell

It’s been a busy few years in terms of market structure and regulatory developments and it’s a complex environment for everyone to navigate. We can expect this to continue in 2023 as both the UK and EU continue to cement their positions on Mifid. It will be interesting to see how the UK’s approach evolves this year and how it will differ from the EU. It is very likely that there will be at least some degree of regulatory divergence between the UK and the EU. We have already seen this in the rules surrounding dark trading.

There’s also the question of timing – will the UK implement change faster than Europe? We know that divergence between the UK and the EU on regulation is not necessarily something that market participants want, but I think everyone is looking forward to a period of greater certainty and stability that will allow us to adapt to evolve and continue to innovate our customers.

What areas proved controversial among participants?

Reaching consensus on rule changes within the EU will always be a more complicated process due to the number of stakeholders – and the compromise agreed could change as negotiations within the EU advance. As an industry, we can only hope that trade-offs do not affect market structure to the detriment of investors and customers.

The consolidated band is arguably the most contentious area, but it is encouraging to see progress towards establishing a band after years of discussions on the subject. Another positive aspect is the inclusion of the “snapshot” data of the best bid and ask prices, which could later open the door for the inclusion of pre-trade data. Hopefully, the European Parliament will take a more ambitious stance (ideally a tape running in real-time, containing both pre- and post-trade data) and seize the opportunity the tape presents to expand European secondary markets with both hands.

What is driving the change of mind regarding systematic internalizers and dark trading?

Brexit was one of the most important drivers. The UK, in the absence of equivalence, has made it clear that its focus is on becoming more globally competitive. The lifting of some of the restrictions on certain types of trading or liquidity under Mifid has been central to this strategy so far. Not surprisingly, the EU is watching the UK and vice versa very closely throughout this process, which is positive.

There is a risk that some of the proposed restrictions in Europe, such as minimum midpoint trading thresholds for dark order books and SIs, which I believe are at odds with global practices, will put EU markets globally at a competitive disadvantage. In the longer term, the consequence could be a shift of liquidity from Europe to other markets, such as the UK, where things are less restrictive.

Dark books and SIs are an integral part of the liquidity landscape – any action taken to limit specific liquidity pools should be backed by empirical evidence and analysis to avoid potential unintended consequences.

However, the European Council’s proposed removal of limits on SIs and the 4% cap at trading floor level for dark trading (in favor of a market-wide 10% cap) is a positive step to reduce some of the complexity introduced by Mifid II over the year 2018. Simplifying the regulatory regime for market participants and fostering growth in European capital markets must remain the focus of the review.

Will these collective changes within the compromise reduce or increase fragmentation in Europe?

The Mifid regime created the fragmented market structure in Europe, which increased the complexity for market participants. The outcome of the review will hopefully address at least some of these issues.

However, fragmentation is not always a bad thing. It drives competition, innovation and execution choice for investors, which is critical to finding execution best. Mifid II has sparked the development and growth of things like algo wheels, regular auctions and conditional trading venues – all of which are now a fundamental part of the liquidity landscape and trader’s toolbox.

How do you think this compromise will evolve during the regulatory process this year?

It’s really difficult to predict where we’ll end up at this point, but there are several other market structure themes that I think will gain more focus for market participants this year. For example, solving the challenges surrounding market failures and the rising costs of market data are key topics of discussion with customers today.