European regulators came under fire at TradeTech Europe 2014 for not taking an evidence-based approach in the framing of MiFID II, which will be passed by the European Parliament in May.
Arjun Singh-Muchelle, senior adviser on regulatory affairs at UK buy-side body the Investment Management Association, criticised politicians and regulators for not properly examining data when making decisions about the future structure of European markets, which he argued will have unintended consequences.
“Dark trading in February represented 9.46% of the European order book. The 1.46% difference between this and the proposed 8% cap is about €12.5 billion of shares in about 780,000 trades. If we cap dark trading, do regulators think these trades will all now go to the lit market?” he asked.
“The evidence seems to suggest they will look to trade on systematic internalisers instead, which are actually less transparent than multilateral trading facilities.”
However, regulators on the panel defended themselves, saying they are currently making a concerted effort to bring together as much market data as possible to help them devise regulatory technical standards for MiFID II as part of its level two phase.
Konstantinos Botopoulos, member of the management board at the European Securities and Markets Association, said: “We have teams working in several different areas related to MiFID that are out there now gathering as much data as possible. The second level of development is key to these efforts to make markets healthier and I believe the data we are bringing together will help us to get it right.”
Panel chair Richard Balarkas also criticised regulators for preying on equity markets in the post-crisis era, despite other markets being more dysfunctional.
“Politicians and regulators say this is needed to make equity markets more efficient, but spreads are very low since MiFID introduced competition to the market. I’m going to be paying a 4% commission and a spread of 30% to convert my euros when I go back to the UK,” he said.
However, Maria Teresa Fábregas Fernández, head of unit, securities markets at the European Commission, said the failings of other markets should not distract regulators from reforming equity markets.
“There are a lot of concerns about access to finance in Europe and we need to make sure equity markets are fulfilling their role of providing funding for the real economy,” she said. “We also want to have good price formation and so we need to be sure that this happens which is why dark pools are being reformed.”
Singh-Muchelle accused regulators of focusing on the equity market because they didn’t understand other markets like fixed income and FX, to much applause from the audience. He also criticised efforts to import equities market practices into other asset classes.
“At the moment, regulators are determined to make the fixed income more equity-like because they don’t understand how this market works. We’re concerned that this could be very dangerous and needs to be justified with evidence,” he warned.