One of the world’s best-known high-frequency trading firms has told European authorities it is too late to start making changes to Europe’s incoming securities rulebook — which has already been beset by delays.
In a letter to the European Commission this week, Tower Research Capital said now was not the appropriate time to be making tweaks to a crucial element of the revised Markets in Financial Instruments Directive.
Europe’s financial firms are scrambling to ensure they are ready for the start of Mifid II on January 3, with the rules already having been delayed by a year because of numerous consultations between regulators and the industry.
Included in the Mifid II text are rules about how banks and HFTs can trade with clients away from traditional exchanges. The so-called Systematic Internaliser regime has already proved one of the most controversial and debated parts of Mifid II.
The Commission has been reviewing how to close a perceived loophole that could allow SIs to connect to each other and recreate venues known as broker-crossing networks, which Mifid II is set to abolish.
Many banks and HFTs registering as SIs, including Tower Research, deny such an intention but the Commission has proposed legal changes to Mifid II ahead of its implementation.
In the letter dated July 18 — the final date possible to submit feedback — Tower Research’s head of compliance in Europe, Alistair McGrath, raised concerns about potential changes to the SI regime at such a “late” stage.
He wrote: “Firms have at this point dedicated significant financial and human resources towards preparing for Mifid II, including the SI regime, on the basis of the published text and the timing of these proposed changes alongside other recent ‘guidance’ creates significant uncertainty for market participants.”
It would be “most appropriate”, he added, for the Paris-based European Securities and Markets Authority to review the SI regime six to 12 months after the implementation of Mifid II.
Mifid II comes down hard on dark trading by introducing caps on the activity and banning broker-crossing networks — venues operated internally by banks where client orders are crossed without having to incur exchange fees.
Instead, equities trading must take place on more traditional exchanges, including multilateral trading facilities, or via systematic internalisers. SIs will have to put their own capital at risk to help counterparties buy and sell securities, rather than merely match buyers and sellers.
Exchanges and some HFTs are worried that SIs will become too attractive for fund managers because they will offer greater flexibility when trading.
Under Mifid II, SIs will be exempt from certain rules, including so-called harmonised tick sizes – agreements between regular exchanges and their participants to only trade in certain price increments.
This will mean the SIs can quote better, or keener, prices to investors than those available on regular exchanges. The concern is that SIs will offer fractionally superior prices to those available on exchange, in order to capture trading flow.
Last week, the Amsterdam-based HFT Optiver called the tick-size issue the “real problem” with the SI regime. In its own letter to the Commission, Optiver said the advantage could see SIs “attract a disproportionate amount of the flow that was intended to move on-exchange”.
Nasdaq, which operates stock exchanges in the Nordic region, has also warned the Commission that these exemptions mean “SIs are extremely likely to capture significant trading flows”.
But Tower does not envisage this outcome. McGrath wrote in his letter: “With regards to tick sizes, we do not envisage, as others suggest, that lack of application of tick sizes to the SI regime would cause a large move to sub-tick size executions.”
Tower’s argument is that best execution — a key principle of Mifid II that calls for market participants to show they have sought the best deal for their clients — is not based solely on finding the best price. It also considers aspects such as market impact, speed, cost and likelihood of execution.