The 2008 financial crisis and the May 6, 2010 “flash crash” have spurred politicians and regulators across the globe to instigate regulation that will protect the safety of our capital markets. Financial crisis aside, the European capital markets regulation, the Markets in Financial Instruments Directive (dubbed MiFID I), was in need of renewal as market participants had become frustrated with many of its unintended consequences.
In October 2011, the European Commission (EC) published its draft for the review of MiFID, dubbed MiFID II, and proposed a new category of trading venue: the organized trading facility (OTF). OTFs have been created as an additional regulated trading venue, which currently consists of regulated markets (RMs) and multilateral trading facilities (MTFs). The proposal suggested that OTFs stretch across all asset classes, including equities, fixed income, and derivatives, and that transparency requirements should be adjusted depending on the type of instrument traded. Broker crossing systems (BCSs, also sometimes referred to as broker-crossing networks, BCNs, and broker “dark pools”) were included under the OTF category in the EC’s proposals. In early 2012, however, the rapporteur for MiFID II, German MEP Markus Ferber, questioned the need for the OTF category in equities and suggested that it should be limited to instruments outside of equities. This amendment was voted on in October 2012 and was accepted by the European Parliament (EP).
Will equities’ markets be able to cope without OTFs? I’ve explored this question in an upcoming research report, and certainly a case can be made for both sides. Some of the European Parliament’s concerns related to OTFs in equities are increased market fragmentation, and the legitimization and proliferation of dark pools, among other things. On the other hand, without OTFs for equities, brokers will have to shut down their crossing systems or convert them to MTFs. Increased operational, functional, and clearing requirements will increase the cost of running such venues, and brokers will have to increase market share or increase the prices they charge clients.
I certainly have my own views about whether OTFs should be in the equities market (in short, yes!… but with modifications). There is, however, still a long way to go before a final legislation is implemented. While we wait to see how it plays out, let’s hope the opinions of market participants are heard and considered.