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

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1 BME SPANISH EXCHANGES COMMENTS ON THE CALL FOR EVIDENCE ON THE IMPACT OF MIFID ON SECONDARY MARKETS FUNCTIONING (CESR/08-872) Madrid, January 9 th, 2009 Bolsas y Mercados Españoles (BME) integrates the companies that direct and manage the securities markets and financial systems in Spain. It brings together, under a single activity, decision-making and coordination unit, the Spanish equity, fixed-income and derivatives markets and their clearing and settlement systems. We welcome the Call for evidence on the impact of MiFID on secondary markets published by CESR on November 3, We take the opportunity to provide the following comments on this document: Introduction As a general matter, in the current situation of financial crisis it is difficult to isolate some particular effects of MiFID in the functioning of secondary markets from those due to the crisis itself. MiFID has not been in force in a normal scenario yet. One of the main lessons to be learnt from the financial stress that all the world economies are experiencing is that the regulated markets have ourperformed other venues, and this has happened during the first year of MiFID. To what extent this has to be credited in the EU to the new regulation or, on the contrary, it has been possible despite some obvious downsides remains to be analyzed. Although it is too early to have a strong position on the effects of MiFID on secondary markets and no data is available yet, or not available along a significant time span, some concerns can be reasonably expressed. Another previous comment relates to the partial scope of the Call for evidence. Some very important issues are not covered, when a major concern about them is held by most regulated markets. For instance, Best execution is only approached in relation to availability of data in a fragmented environment, while other important aspects, such as the capacity of enforcement or the CoB rules of intermediaries ought to be taken into account. Another worrying issues are conflicts of interests or order handling. In fact, almost all the questions posed by CESR have to do with the Markets section of MiFID. 1

2 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 brought greater competition, which is beneficial to the market as a whole if and only if a level playing field is guaranteed. We understand that competition must not be considered as an end in itself but as a means to achieve certain strategic objectives. These can be summarized in the general objective of the original FSAP: wider conditions for an optimal single financial market. As far as this target will be reached, MiFID effect will have been positive. Nevertheless, it is early to assess it. Competition is not new to regulated markets, even in those jurisdictions where, until MiFID, the so-called concentration rule was in force. Neither is it new the permanent effort to provide the highest quality services to the financial community: top technological tools, constant innovation of products and services, enhanced market structure, competitive corporate shape, better corporate governance A sound European securities market was the result. BME takes MiFID as an opportunity to improve and consolidate its position as the reference for those securities admitted to trading in any of their markets. New services on transaction reporting, market interfaces, transparency, etcetera have been put in place. But we want also warn against the risks of an imbalanced enforcement. In particular, from our point of view the key benefit for the quality of the market is the post trade visibility of trades executed Over the Counter or internalised. These trades with a lot of limitations in connection to the quality of the data were hidden to the market before Mifid and now they are partially visible. Transaction Reporting is also a good result of the implementation of Mifid. This information is key to study market abuse cases. 2. Do you consider that there are any remaining barriers to a pan- European level playing field across trading venues? If so, please explain. Two provisions of MiFID, namely the mutual recognition of authorization (passport) and the regulation of new trading venues (end of the concentration rule), eliminate any possible barrier to competition among trading venues. From the trading point of view venues such as SI, MTF and OTC are fully operative. 2

3 However, it is not clear that a level playing field has been set. Some provisions mean a different burden according to the type of venue. Transparency regulation are heavier for RMs, there are loopholes in the SI definition that make it possible internalizing orders off compliance, alternative trading venues backed by RMs seem to support a harder supervisory touch, etcetera. 3.Do you think that MiFID has supported innovation in the equity secondary markets? Please elaborate. As we said in our response to Q1, European Regulated Markets have been innovating in the equity secondary markets since the launch of the electronic order books in the early 90s. They have been competing between them in terms of type of orders, market microstructure, latencies and types of listed products. Most of the MTFs were operating already before the entry into force of Mifid. RMs have evolved since November 2007, providing new products and services, setting up new venues and market segments. But it is difficult to ascribe it to the influence of the new regulation. 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. In the last year there has been an increase in the market bid-ask spread. It is not easy in this situation to separate the part that is inherent to a deterioration of the price discovery as a consequence of the fragmentation of the market and the arrival of crossing venues (OTC) with its lack of pre trade transparency. In any case any loss in the spread is much more important in terms of execution of the orders than any possible saving in fees. 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. We see an asymmetry in the post trade transparency requirements between on the one hand RM-MTF and on the other hand Internalisers and OTC. OTC is not regulated at all under Mifid and this is a big problem for the other types of venues and for firms to fulfill the best execution. We do not see an equal accuracy of the information between pre trade and post trade in RM-MTF 3

4 and SI-OTC (for instance Markit Boat is publishing information with a delay of 2 hours when Regulated Markets and MTF publish information with a delay of 15 minutes) 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. Regulated Markets have been reducing costs in the last years linked to the increase in the market volume to accommodate new market participants and new technical environments. We maintain that implicit costs of trading are bigger than explicit ones, so Market authorities have to take care about the best execution rule enforcement to be sure that Mifid is not going to result in an increase of costs for the final clients. 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 the entry of new venues we have seen an inevitable market fragmentation as a consequence of competition. This new environment has created new opportunities for market participants in terms of trading strategies and access to the market. However, this new environment should not lead to the existence of nontransparent venues, non-neutral venues that could mean less transparent markets with an impact on the price discovery process and the safety of the system. 8.Do you think that MiFID pre- and post-trade transparency requirements adequately mitigate potential concerns arising from market fragmentation? As the best execution rule is not being properly monitored and due to the allowance of many waivers based on volume of orders (Standard Market Size and orders large in scale), type of clients or type of venues there is a real risk of liquidity fragmentation. 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. 4

5 Data We think that Standard Market Size and levels for orders large in scale are lower than they should be leading to high risk of liquidity fragmentation. With higher levels, more orders would be published in the order book and the quality of the price formation process would be better. 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? We are not aware of any benefit of dark pools. 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? Dark pools reduce market transparency retrieving orders from the public order books and by doing so they lower the quality of the price formation process and increases the trading costs. 12.Do you consider the MiFID pre- and post-trade transparency regime is working effectively? If not, why not? As pointed out in question 8, we think pre- and post-trade transparency regime is not working effectively due to the leak of liquidity coming from the different waivers and from some less transparent venues. 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? In order to measure the best execution rule we use bid-ask spreads for different venues for pre trade transparency and post trade information. The accuracy of this information is not the same and is not as accessible as desired. 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. We miss a standard delay for pre and post trade information. In general, Market data on RMs activity is provided for free with a delay of 15 minutes. Such a service is not provided by other data providers earlier than one or two hours for other venues activity. We consider as positive a harmonization of this delay. We consider that Markit Boat data incorporates double reporting of trades. 5

6 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. 16.Does the current availability of data facilitate best execution? If not, please elaborate. As we said in our answer to Q1, our concern in relation to this matter is the possibility of the supervisory authorities to control the fulfillment of the best execution by the members of the venues. 17.Do you think that commercial forces provide effective consolidation of data? If not, please elaborate. Yes. There are some concerns about the quality of reported data across different trade reporting venues but we see that commercial forces will adjust it. We strongly advise against a USlike consolidated tape solution. 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 we stated in our answer to Q1, MiFID has made it possible new entrants come to provide services in a competitive environment. For it to be beneficial to the entire market, a level playing field must be guaranteed. We hold legitimate concerns about the latter. Some important provisions aimed at investor protection and market integrity, such as best execution and transparency, may be not properly designed or even enforced. Issues like conflicts of interest, lack of neutrality of new venues operators or liquidity fragmentation also raise serious concerns. We support a thorough assessment of the effects of MiFID based on hard data and, if it turns to be the case, a deep revision targeting the achievement of the FSAP original objectives. 19.Do you see any other impact or consequence of MiFID on equity secondary markets functioning? 6

7 7 Please refer to our answer to Q1.