CALL FOR EVIDENCE ON THE IMPACT OF MIFID ON SECONDARY MARKETS FUNCTIONING (CESR/08-872)

Transcription

1 9 January Paternoster Square London EC4M 7LS Telephone +44 (0) Carlo Comporti Secretary General CESR Avenue de Friedland Paris FRANCE Dear Carlo CALL FOR EVIDENCE ON THE IMPACT OF MIFID ON SECONDARY MARKETS FUNCTIONING (CESR/08-872) Thank you for the opportunity to provide our views on the impact of the Markets in Financial Instruments Directive (MiFID) on the functioning of equity secondary markets. The London Stock Exchange provides an active and efficient market for trading in a wide range of securities. In the UK, an average of 739,000 trades per day are executed on the UK electronic order book (SETS) alone with an average daily value traded of 8.3 billion. The Exchange has been active in the formation of MiFID since the process first began over eight years ago. The review of how well MiFID is functioning is naturally an area of considerable interest to us. This call for evidence marks one of the first steps in what we anticipate to be an extensive review of MiFID over the next couple of years by CESR and the Commission. The key question behind such reviews should be whether the market since MiFID s introduction is fundamentally a better one. We have certainly seen innovation and technological development, but it is hard to establish whether it occurred because of rather than in parallel to MiFID. One of the key objectives of MiFID in relation to shares admitted to trading on regulated markets was to promote competition and the creation of new trading venues. Increased competition should lead to better results for investors and a reduction in the cost of capital for issuers. It is clear to us that these outcomes have not been achieved. Indeed, to the extent that one can disaggregate MiFID effects from those of the financial turmoil in markets, there is evidence of deterioration in market quality and efficiency. For 1

2 instance, since November 2007 search costs and implicit costs such as trading spreads have all increased markedly. We believe that an excessive focus on competition between venues may overlook some other, more interesting, dynamics in the market such as the apparent decrease in competition between firms (broker/dealers and liquidity providers). This competition is the vital element that ensures that the price formation process is optimal, that spreads are kept tight and that investors receive the best price available: a decrease in this competition will therefore have negative consequences for investors. For example, FTSE 100 spreads were at 15 basis points on 1 November 2007 and have widened by 87 percent to 28 basis points on 1 November Investment firms running their own trading venues either independently, or worse in collaboration with each other, create conflicts of interest, which if unchecked risk posing serious damage to European markets. Phenomena such as this could have much more damaging effects on investors and corporate issuers cost of capital than any marginal benefits ensuing from venue competition, where fees are a very small (and rapidly decreasing) fraction of total transaction cost. We believe that CESR should be concerned with the move of trading away from transparent well-regulated exchanges, to OTC platforms/broker dark pools that evade important regulatory measures, not least the transparency provisions so vital to protect investors interests. So whilst MiFID has been successful in areas such as the creation of cross border trading platforms and in the harmonisation of investor protection rules we believe MiFID has had some negative structural effects on EU markets. We answer the specific questions posed by CESR in Appendix I. In summary, our main points are as follows: liquidity captured by OTC dark pools has been diverted away from the optimal matching of supply and demand that pre-trade transparency is designed to recreate. MiFID has encouraged a trend away from transparent well-regulated markets traditionally provided by exchanges, encouraging trading on to OTC platforms and broker dark pools, where there is no pre-trade transparency and significantly reduced levels of surveillance. Regulators need to consider with some urgency the consequences - such as systemic or structural concerns and impact on market quality - if the proliferation of unregulated/otc dark pools continues; MiFID has failed to establish a level playing field: broker crossing networks operate OTC by evading both systematic internaliser and MTF classifications (and thus the subsequent rules on pre-trade transparency), and yet these unregulated exchanges compete with regulated markets and MTFs, both of which are subject to pre-trade transparency rules that have proven to be inflexible and inappropriate. This increases the regulatory gap between offexchange trading and on-exchange trading, and increasingly hampers the ability of regulated markets to attract orders from off-exchange; 2

3 the post-trade transparency regime, whilst not being perfect, is working reasonably well. Where there are residual issues pertaining to post-trade transparency, we believe that market aggregation solutions are available. I hope our views are helpful to CESR s work. Please do not hesitate to contact me if you wish to discuss any aspect of this letter. Yours sincerely Adam Kinsley Director of Regulation T: +44 (0) akinsley@londonstockexchange.com 3

4 APPENDIX I Benefits 1. What do you think are the key benefits for yourself or the market more generally that have arisen as a result of MiFID provisions relating to equity secondary markets? MiFID has increased transparency in jurisdictions that did not previously have comprehensive post trade disclosure rules. MiFID has also facilitated the creation of cross border trading platforms. The harmonisation of investor protection rules, creating a common framework, is also a beneficial advancement. However, one of the key objectives of MiFID in relation to shares admitted to trading on regulated markets is to remove concentration rules and promote the creation of new trading venues. The philosophy is that increased competition leads to better results for investors and reduced cost of capital for issuers 1. It is unclear to us that these outcomes have been achieved. Whilst there are more venues, we do not believe these have led to cost savings for end investors. Indeed, it is our understanding that search costs and implicit costs such as trading spreads, informational shortfall and costs associated with information leakage have all increased. It is important to note that explicit venue fees are a small fraction of wider trading costs and even when venues have cut their execution fees, we remain unconvinced that these savings have been passed on to end investors. We believe that an excessive focus on competition between venues may overlook some other, more interesting, dynamics in the market such as the potential decrease in competition between firms (liquidity providers) which could explain part of the increase in wider spreads and market impact. Phenomena such as this could have more damaging effect on investors and corporate issuers cost of capital than the benefits ensuing from venue competition. 2. Do you consider that there are any remaining barriers to a pan-european level playing field across trading venues? If so, please explain. Yes for reasons we explain in more detail below. Systematic Internaliser regime MiFID introduced the systematic internaliser regime, with the objective of capturing the order flow that was internalised by investment firms and subjecting them to pre- 1 Internal Market Commissioner Charlie McCreevy said at the time: "MiFID is a ground-breaking piece of legislation. It will transform the landscape for the trading of securities and introduce much needed competition and efficiency. The cost of capital should go down over time, and this will have major benefits for the European economy. Last but not least, investors gain in terms of greater choice and stronger protection. 4

5 trade transparency obligations. After lengthy negotiation a systematic internaliser was defined as an investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or a multilateral trading facility (MTF). It is interesting to note that, one year on, the CESR database lists only 12 systematic internalisers 2, when perhaps a greater number would have been expected. In addition, some of the firms that are registered as systematic internalisers are not satisfying their pre-trade obligations fully. Quotes are sometimes not timely or lacking in substance, for instance not reflecting market conditions (with too wide a spread). As a result, vendors may choose not to carry such quotes as they are not meaningful - making it hard for investors to see the quotes. MTFs MiFID defines MTFs as a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments - in the system and in accordance with nondiscretionary rules - in a way that results in a contract We have recently witnessed an influx of broker crossing networks 3 that would appear to be doing the business of organised venues but instead they are operating under the OTC banner, and therefore outside of all pre-trade transparency obligations. Certainly these crossing engines are heavily marketed in a way that implies they operate a system that brings together multiple third-party buying and selling interests in financial instruments. We believe that such platforms take a literal interpretation of the definition of MTF and deliberately structure themselves in such a way that they are not captured by the definition. For example, the definition is avoided if the operator of the system applies discretion (or management ) to the way that trading interests interact, yet we are aware of some of this management being an algorithm whose sole function is to place the order into the dark pool. Level playing field The reason why we are making these points in a question relating to level playing field issues is that while the OTC trading venues evade both systematic internaliser and MTF classification (and thus the subsequent rules on pre-trade transparency), they compete with regulated markets and MTF trading venues, both of which are subject to pre-trade transparency rules that have proven to be inflexible and inappropriate. 2 Systematic internalisers registered with CESR as at December 2008: ABN AMRO Bank N.V; Danske Bank; Deutsche Bank Aktiengesellschaft; Goldman Sachs International; Lehman Brothers International Europe; Nordea Bank Danmark A/S; Citigroup Global Markets Limited; Citigroup Global Markets U.K. Equity Limited; UBS Ltd; UBS AG (London Branch); Credit Suissse Securities Europe Ltd. See: &subsection_id=0 3 Examples of OTC venues include: CA Chevreux Alternative Crossing Engine; Citi LIQUIFI; Credit Suisse CrossFinder; GS SIGMA X; Instinet dark pool; Knight Match; Merrill Lynch MLXN; MS Pool; UBS PIN. 5

6 This increases the regulatory gap between off-exchange trading and on-exchange trading, and hampers the ability of regulated markets to attract orders from offexchange. One example of this is the application of waivers to regulated markets. Waivers and discretionary orders The Order Management System (OMS) waiver to pre trade transparency has been interpreted by regulators in a very restrictive way. This appears to be due to a focus on the iceberg OMS functionality operated by regulated markets at the time the directive and implementing measures were considered up to some five years ago and appears to preclude some of the useful innovation we believe that an OMS can offer and the wide scope for innovation implied in the level 1 directive. At the same time, we understand that non-transparent discretionary orders have been permitted by some regulators in a way that is very much against market interest. We would ask CESR to look at this matter with some urgency. This seems to us to lead to a perverse situation; if a narrow reading of the OMS waiver precludes the management of orders, we think a permissive approach in allowing discretionary orders, which can be used to mirror small size non-display order functionality, is an inconsistent and damaging decision - especially as the use of discretionary orders raises questions about the fairness of markets to non sophisticated users. For example, if the best bid and offer (BBO) of a stock were , a firm could place a displayed order to buy at 99.5, with hidden discretion of +1.5p to mimic a hidden mid price order. As we understand it, this would match against both IOC orders 4 and limit orders from a price of 101 to the tick above 100 (when the first displayed order would have priority). As a user of such an order type, it seems that the firm can effectively mimic a non displayed mid price order by keeping its published limit away from the BBO and adjusting the improvement amount to sit in the middle of the spread (indeed, as these orders can also be pegged to the BBO and use iceberg functionality, it appears to be relatively easy to do this). It seems wrong that standard non display orders of any size using an OMS can be barred, yet a complex method of mimicking them should be allowed. With regard to the fairness of discretionary orders, it is worth stressing that despite the sophistication of markets and their participants, a participant who is not sophisticated can submit an aggressive order and know that they will get the best price available. It seems to us that in order to get best execution in a market with discretionary orders a participant could not simply submit an aggressive order and know that they would get best price and they would have to instead ping the market at each possible price level before hitting an opposite order. Such functionality is not currently available to smaller brokers (especially retail). This seems to us to be another reason why discretionary orders should be questioned, even if all ordinary non display orders were allowed. 4 IOC Immediate or cancel, a non persistent order submitted to the system which will fill to the extent it is able within its conditions (price, min size) and the opposing orders available and then be deleted. 6

7 To summarise, we feel the fact that some organised venues are operating OTC has meant that MiFID has failed to create a level playing field amongst all the venues and is not good for the market overall. It might be necessary to review the definitions at Level 1, however it might be preferable for supervisors to enhance their enforcement perhaps making it clear that the spirit, rather than the letter of the directive should be followed. We also believe that CESR should consider, with some urgency, the ramifications of discretionary orders on the functioning of EU markets. 3. Do you think that MiFID has supported innovation in the equity secondary markets? Please elaborate. It is hard to say whether or not MiFID has supported innovation in equity secondary markets. Many commentators will point to the influx of new trading venues - as well as new types of venue such as dark pools - as examples of innovation. However, we believe that this innovation occurred in parallel to, rather than because of MiFID; it is our opinion that market developments are largely the result of wider factors. For example, we are now experiencing faster trading systems that have more capacity than ever. However, this was the trend we have been seeing for some time. In 2003 the London Stock Exchange s latency was 120 milliseconds. Four years later, and before MiFID was introduced this had reduced to less than 10 milliseconds 5. Whilst this makes for a better market place, it cannot be attributed to MiFID because it was (at least for the Exchange) happening anyway. We also believe that the pre-trade transparency waivers (see Q2) - or at least, the very literal interpretation of them - have hindered market innovation for regulated markets. Downsides 4. Have you faced significant costs or any other disadvantages as a result of MiFID relating to equity secondary markets? If so, please elaborate. Have these been outweighed by benefits or do you expect that to be the case in the long run? If so, please elaborate. Naturally, we incurred costs as a result of the introduction of MiFID - such as updating the trading system and rewriting the Rules of the London Stock Exchange. This is part of a constant process of adapting to evolving markets and developments in regulation, technology, customer preference etc. Our customers have also faced costs such as developing MiFID complaint systems and processes. Although these costs are important, our primary concern now lies more in the overall impact of MiFID on market quality and structure and the evolving dynamic between market players; the long term effects of which are unknown. 5 In June 2007 the Exchange launched TradElect, a new trading system giving us greater ability to develop and enhance our range of services. Both capacity and speed of trading have increased. At launch, TradElect gave the market the ability to execute trades fully and resiliently in around 10 milliseconds. This now stands at 5 milliseconds and will reduce further. 7

8 For example, we believe that an excessive focus on competition between venues may overlook some other, more interesting, dynamics in the market such as the potential decrease in competition between firms (liquidity providers) which could explain part of the increase in wider spreads and market impact. Phenomena such as this could have more damaging effect on investors and corporate issuers cost of capital than the benefits ensuing from venue competition. There are also implicit costs of fragmentation (discussed in more detail in Q6) and disadvantages of an un-level playing field between venues (as discussed in Q2). 5. Have you seen/experienced any unexpected consequences in terms of level playing field arising from the implementation of MIFID provisions relating to equity secondary markets? If so, please elaborate. Yes. Please see Q2 for further details. Trading Costs 6. What impact do you consider that increased competition between equity trading venues is having on overall (i.e. implicit and explicit) trading costs? Please elaborate. Explicit costs The market has undergone a recent shift towards new trading strategies such as algorithmic and high frequency trading. Our pricing structure is constantly under review and as a result of the changing nature of our participants trading behaviour, on 1 August 2008 the Exchange outlined a new price list for trading services (which took effect from 1 September ). This pricing change, whilst improving market efficiency and growing liquidity generally, supports the increasingly important role played by algorithmic traders as the key liquidity providers of the future. While it is true that trading fees have reduced in the last year, venues explicit fees are a very small part of the total cost to trade. But probably the biggest consideration is whether this reduction in prices is even noticed by end investors, especially if it fails to be passed on. Implicit costs When assessing trading costs, we need to ensure we include implicit or market impact costs. One of the most common measures of market cost is the difference between the best available bid and offer price: the spread. The graph below shows time weighted average spreads of MiFID stocks on the London Stock Exchange from January 2006 to December Average spreads are relatively flat throughout 6 For more information, see: 0A8E787A58C7.htm 8

9 2006 and the first half of However, it is evident that over the past year, spreads have increased quite considerably. While recent market conditions must account for some of this, making it difficult to isolate the effect of MiFID in such circumstances, it is impossible to claim that MiFID has reduced the cost of trading in equities. Average Time Weighted Spread of MiFID stocks 1200 Average Time Weighted Spread (basis points) Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Month Potential fragmentation 7. Do you think that there has been significant fragmentation of trading and/or liquidity in European equity markets? If so, please elaborate. Do you think that such fragmentation raises concerns (for example, does it impact on the price formation process, the overall efficiency of the markets, search costs, best execution requirements)? If so, please elaborate on those concerns. With increased competition comes increased fragmentation of the market; it is an unavoidable consequence. The proliferation of venues has meant fragmentation of liquidity and reduced depth of order books. This makes it harder for the buy-side and the smaller brokers to assess venues and get a quality execution. Technology is available to facilitate execution, such as smart order routing systems. But these solutions are available only to the largest players. This leads to a situation which favours larger firms over smaller ones. As suggested in the question, costs such as implicit costs, search costs and compliance costs all appear to have increased. 8. Do you think that MiFID pre- and post-trade transparency requirements adequately mitigate potential concerns arising from market fragmentation? 9

10 As discussed earlier, we do not believe the pre-trade transparency regime is working effectively or evenly across venues. We believe the post-trade regime, whilst not being perfect, is working reasonably well. Where there are residual issues pertaining to post-trade transparency, we believe that market aggregation solutions are available, thus mitigating concerns in this area. We discuss this fully in our response to Q14. Transparency 9. Is the categorisation of shares appropriate in relation to: the definition of liquid shares; standard market size ; orders large in scale ; and deferred publication? If not, please elaborate. MiFID deferred publication rules around large trades have effectively been relaxed (at least as far as UK market participants are concerned) which has increased the possibility of large trade reports being excluded from same day trading volumes. This can create confusion for users of the data. Whilst we agree it is right for certain trades to be able to utilise the delay, we believe there is no reason why firms should not report large trades as soon as the risk has been offset. We therefore believe it would be desirable for CESR to review whether the definition is functioning as it was intended. (Please see Q14). 10. Do you see any benefits (e.g. no market impact) to dark pools of liquidity (to be understood as trading platforms using MIFID pre-trade transparency waivers based either on the market model or on the type or size of orders)? If so, what are they? It is important that participants are able to trade larger orders with minimal market impact. To this end, dark pools serve a market need for trades which are larger than average. Dark MTFs provide the facility for the market to transact certain types of business in European equities with the confidence of total pre-trade anonymity. This is alongside and complementary to the efficient price formation of the lit order books, where the majority of equities across Europe are traded. 11. Do you see any downsides to dark pools of liquidity (e.g., impacts on the informational content of light order books)? If so, what are they? Liquidity captured by dark pools is diverted away from the optimal matching of supply and demand that pre-trade transparency is designed to recreate. This should not be a problem if liquidity within each dark pool is sufficiently deep, or if smart order routing is effective in its ability to retrieve and benchmark the best price from a range of different venues. However, the trend towards an overall increase in dark liquidity in Europe does raise interesting and important policy questions for regulators. The overall 10

11 objectives of exchanges has always been to provide clear, fair, transparent markets. Policy makers may question the extent to which MiFID has started a trend away from this, encouraging trading on to OTC platforms where there is no pretrade transparency (and indeed dark pools run by exchanges and MTFs). This may raise systemic concerns for the market, which policy makers may wish to explore. A further issue is that of market surveillance if these dark pools are classified as either systematic internalisers or OTC venues (or even perhaps, some MTFs) then not only is there no pre trade transparency, but also there is likely to be significantly reduced levels of surveillance (historically provided by exchanges). Whilst dark pools may not pose systemic or structural concerns when attracting only a certain percentage of total market share, regulators need to consider whether there will be consequences such as an impact on market quality if the proliferation of dark pools is left to continue to grow without any scrutiny by regulators. 12. Do you consider the MiFID pre- and post-trade transparency regime is working effectively? If not, why not? As discussed under Q2, we believe that the definition of systematic internaliser is too narrow, as is the scope of the MTF definition. Data 13. What MiFID pre- and post-trade transparency data do you use, and for what purpose? Does the available data meet your needs and the needs of the market in general? The Exchange is a provider rather than a user of data, therefore we cannot comment on whether the available data meets the needs of the market (that is more a question for consumers of the data). 14. Do you think that MiFID pre- and post-trade transparency data is of sufficient quality? If not, please elaborate why and how you think it could be improved. It is clear from comments by market participants, especially the buy-side, that there are frustrations within the market about the quality of market data. We believe this stems from the fact that whilst MiFID mandates that trades done away from an exchange must be reported, little detail is provided on how this should occur. This has resulted in problems such as over-reporting to ensure compliance, poor quality control checks by some platforms and a lack of standardisation (such as multiple currencies for a particular security). Market wide concern about the quality of reported data across different trade reporting venues has resulted, potentially compromising aggregation solutions. We are sympathetic to such concerns, however we believe that this is part of the adjustment process for MiFID and we do not believe any further regulatory intervention is currently required: market pressure should be sufficient to rectify this 11

12 issue (and as we explain in Q15, we do not believe that a consolidated tape is required to counter this specific issue). We are actively working with other interested participants from across the market to find market-led solutions to deliver consistent higher quality post-trade data, which can then be aggregated, disseminated and used with increased confidence. In the UK, in order to help overcome some of these problems, FSA recently set up a working group, wherein industry participants have joined together to try to ensure a cohesive approach, with the objective of producing better quality data. We believe this has been successful in reducing the problem of over-reporting. In addition, other existing industry groups are working constructively on the issue of data standardisation, such as ANNA (the Association of National Numbering Agencies) 7 and FISD (The Software and Information Industry Association's Financial Information Services Division) 8. It would seem that any improvements that may need to be made relate to the quality of data that is input into the system. As such, trade reporting requirements may need to be amended or further guidance given to firms. We believe high quality data is at the heart of market solutions. Such solutions have quickly emerged and we firmly believe they are better than an inefficient legislative one certainly if the outdated US consolidated tape is anything to go by. However, there are a couple of issues which may warrant further examination by CESR. Firstly MiFID deferred publication rules around large trades have effectively been relaxed (at least as far as UK market participants are concerned) which has led to the possibility of large trade reports being excluded from same day trading volumes. This can create confusion for users of the data. Whilst we agree it is right for certain trades to be able to utilise the delay, it would be desirable for CESR to review whether the definition is functioning as it was intended. Secondly, most (but not all) venues make their data available for free after 15 minutes. We believe that if this was established as an industry best practice standard, it would go a long way to remedying some of the issues, particularly as the largest OTC provider - Markit BOAT - currently only makes its data available for free after 2 hours. 15. Do you think that there has been significant fragmentation of market data in the EEA equity markets? If so, please elaborate. Do you think that such fragmentation raises concerns (for example, does it impact on the price formation process, the overall efficiency of the markets, search costs)? If so, please elaborate on those concerns. The introduction of competition has naturally led to increased fragmentation of market data in the EEA equity markets. However, we do not believe that such fragmentation raises concerns because market solutions can re-aggregate the data. We believe that there are already a range of products offered by vendors that consolidate data into single displays. The examples set out below are of screenshots of individual securities, sourced from one provider amongst the 200+ domestic and international vendors that operate across the EU. Such vendors

13 service both professional and non-professional subscribers and provide a plethora of solutions to aggregate and disseminate pre-trade prices and post-trade data, based on market-led demand. We are not aware of any widespread problem with European pre-trade data dissemination and the market is functioning well. In fact, a range of solutions to aggregate and disseminate pre-trade price data already exist. For example, the screen shot below shows details of trading in Vodafone shares and is provided by Fidessa. This shows the best available bid and offer price currently available across a range of markets (Chi-X, Turquoise, London Stock Exchange). The data at the very bottom of the screen shows the best bids and offers at a range of venues. The main data display consolidates the full order books from the individual venues, creating a fully consolidated pre-trade order book. There is also a feed of post trade data in the top right hand corner showing the last five trades that have taken place in this security. Source: Fidessa It is possible to also see full post-trade information. You will see from the next screenshot, Fidessa s detailed post-trade tape (or time and sales ), which includes not just the trade information from the organised venues but also the post-trade data provided through OTC channels such as MarkitBOAT (these trades are identified by the instrument code VOD.XLON-GBX.BT 9 ). This screen also helpfully shows the prevailing best bid and offer in the market at the time of the trade, thereby assisting investors to ascertain if they have achieved best execution (if price is their only consideration). 9 VOD.PL = PLUS Markets; VOD = London Stock Exchange; VOD.L.CX = Chi-X; VOD.XLON-GBX.BT = BOAT 13

14 Source: Fidessa Fidessa is just one vendor, but all the major vendors aggressively compete across Europe and have been quick to respond to demand in developing their products to provide commercially viable services that meet investors needs. We strongly believe great care needs to be taken when legislators and policy makers call for a consolidated tape. It is possible for this to be misinterpreted as a statement of intent to legislate for the creation of a single, mandated, utility provider. We believe such an outcome to be highly undesirable. A legislated consolidated tape would impose a one-size-fits-all solution across Europe, thus removing choice by limiting competition and thwarting the development of innovative solutions. We also believe it would require major structural and regulatory change to be viable, leading to unjustifiable development costs and upheaval across the market. For example, a large and expensive industry body like SIAC in the US would be required to normalise all these feeds and deliver them to the market. Regulation-led costly development would be needed to force all participants and venues to connect as they do in the US. Instead of using existing infrastructure and software, new or expanded communications links and feed handlers would be likely, bringing significant new costs and impacting down-stream systems, including complex 14

15 trading applications. The network bandwidth and processing power required to aggregate and distribute real time data across all Member States/exchanges within the EU, would be extremely expensive - and would continue to grow. The location of the SIAC and the tape would potentially be a contentious and politically sensitive decision. Importantly, geographic location of a data source is increasingly significant for latency sensitive traders (such as high frequency traders) who want data directly without any delays. Reduced latency is extremely important and this is demonstrated by strong demand for co-location or proximity hosting 10. The reality is therefore that some venues and firms would benefit and some would lose from wherever the ticker plant for a mandated European consolidated tape was physically located. A further issue is that US tapes only consolidate top of book data to deliver a national best bid and offer (NBBO), while Europe s algorithmic driven traders would want full depth of book data, so would continue to take data directly. Inefficient duplication of services is the likely outcome, as large firms in Europe would always opt for direct feeds from venues over a consolidated tape. If the system were to develop along the lines of that in the US, Europe would also need to change its best execution definition, to reduce existing flexibility and prioritise price. This is incredibly pertinent, since recent developments such as the collapse of Lehman Brothers have shown that the multi-parameter definition that the EU has under MiFID is superior, as it allows important factors such as settlement certainty and counterparty risk to be prioritised if deemed necessary 11. It is worth highlighting that US stakeholders do not see their system as a panacea. Indeed, US commentators have often noted the inefficiencies and costs of the arrangement Does the current availability of data facilitate best execution? If not, please elaborate. We acknowledge concerns from the buy-side that in a post-mifid fragmented market, it is hard to verify if best execution has been received. We believe that such problems will recede once the short term problems with market data have been fixed. In contrast, we have heard calls for a US-style trade through rule. We would like to explain why we do not believe this would be a viable solution for the EU. Firstly, in the US there is only one clearing and settlement provider and therefore only one set of post trade costs. In the EU, this is not the case; a trade-through rule would not take post-trade charges into consideration and this could lead to distortions. Secondly, if the system were to develop along the lines of that in the US, Europe would also need to change its best execution definition, to reduce existing flexibility 10 See: 11 The IMA Survey MIFID: One Year On finds that settlement certainty and counterparty risk have more recently often become the most relevant factor in the provision of best execution following the collapse of Lehman Brothers. 12 See the Seligman report : 15

16 and prioritise price. This is incredibly pertinent, since recent developments such as the collapse of Lehman Brothers have shown that the multi-parameter definition that the EU has under MiFID is superior, as it allows important factors such as settlement certainty and counterparty risk to be prioritised if deemed necessary 13. Another consideration is that a trade-through rule would not consider the prices available in dark pools. This could become a concern if the market share of dark pools increases. [Further details on market share of various trading platforms are set out in Appendix II] 17. Do you think that commercial forces provide effective consolidation of data? If not, please elaborate. Yes. In Q14 we noted that improvements need to be made to the quality of data that is input into the system (i.e. trade reported). However, we believe that once these issues have been resolved, the commercial forces will provide an effective consolidation of data service. Over 200 domestic and international vendors currently serve Europe, providing a plethora of solutions to aggregate and disseminate pre-trade prices based on market-led demand. Examples of the data that is already available are shown in our response to Q15. General 18. Do you think that the implementation of MiFID is delivering the directive s objectives in relation to equity secondary markets (e.g., fostering competition and a level-playing field between EEA trading venues, upholding the integrity and overall efficiency of the markets)? If not, why do you think those objectives have not been met? As noted above, competition amongst trading venues has increased but the competition for price formation between investment firms, on behalf of investors seeking best execution, appears to be diminishing in an environment where conflicts of interest have increased sharply. The important question is whether the end investors have benefited from MiFID, and whether the cost of capital has reduced. There is no evidence that this has happened. We believe there are a number of issues relating to the integrity and overall efficiency of the markets which regulators need to examine these are outlined in preceding answers (e.g. the systematic internaliser regime, discretionary orders, unregulated/otc dark pools, and reduced competition for price formation between firms). 19. Do you see any other impact or consequence of MiFID on equity secondary markets functioning? We see no further impacts and consequences of MiFID than those set out in our previous answers. 13 The IMA Survey MIFID: One Year On finds that settlement certainty and counterparty risk have more recently often become the most relevant factor in the provision of best execution following the collapse of Lehman Brothers. 16