New Tweaks to MiFID/MiFIR Recall College Daze

Certain contemporary developments in Europe remind me of an incident that took place while I was attending college. A buddy of mine (whom I will call Ted) was arrested for driving intoxicated on a sidewalk in the downtown area of the small mid-Hudson Valley city nearest our campus. On his behalf it can at least be said that he was driving slowly: anybody there had plenty of time to get out of his way.

I went to the police station to pick Ted up. I should mention that this was before MADD really took off – back in a time when such incidents (if no damage was done) were often considered just “stupid college kid stuff” and treated less seriously than now would be deemed necessary. The perp would often be released without bail, assuming he could get a buddy to pick him up: as Ted obviously could.

When I did just that I found Ted humorously indignant that among the charges listed in the arrest report was: speeding.

“How exactly,” he asked me rhetorically, “could I have been speeding on a sidewalk?  If there is a lawful speed above zero for a motor vehicle on the sidewalk, I was probably going under it. If there isn’t, it shouldn’t be a charge!”

We’ll Get Back to That

MiFID, the 2010 re-working of the 2004 Markets in Financial Instruments Directive, has given rise to MiFIR, the implementing regulation.  And MiFIR is nearing completion.

On June 10, 2013, authorities in Brussels released a new proposal for tweaking MiFIR on matters including over-the-counter derivatives, central counterparties and trade repositories.

Under the new rules there will be three types of trading facility: the regulated market; the multilateral trading facility, and the organized trading facility.

Dark Pool Limits

MiFIR includes provisions that allow for “dark pools” and that limit the size –or, if you will, the depth – of those pools. Article 4(1)(a) and 4(1)(b)(i) create waivers that allow “competent authorities” to authorize certain systems to refrain from making public certain information [in essence, depth of trading interest].  The essential requirement for these systems is that their reference price is “widely published and is regarded by market participants as a reliable reference price.”

Section 4a(1)(i) until quite recently, limited the depth of any one of these dark pools as regards any specific instrument to 5% “of the total volume of trading in that financial instrument on all trading venues across the Union over the previous 12-month period.”  Apparently, there was some concern that that limit wasn’t sufficiently restrictive. In the latest draft, the number 5 is crossed out there and the number 4 written in before the percent mark with a thick market pen.

Likewise, section 4a(1)(ii) until recently limited the depth of trading in all dark pools across the EU in any financial instrument to 10% “of the total volume of trading in that financial instrument on all trading venues across the Union over the previous 12-month period.”  Again, here, the number 10 was crossed out and the number 8 substituted.

A Sidewalk or a Road

Now, if (and I emphasize if) one were persuaded that dark pools are inherently evil, and that they serve no purpose, then limits of 4/8% would of course be better than limits of 5/10%. But in that case, 3/6% would be even better. Best of all, perhaps … 0/0%, which happens to be the proper speed for a motor vehicle on the sidewalk.

On the other hand, if there is a good reason to allow any dark pools, then participating therein – or opening and maintaining the pool – isn’t a matter of driving on the sidewalk. It is a residential street, where cars are allowed to drive and a speed limit is clearly posted.

But then, some reasons ought to be forthcoming? Why the move from 5/10% to 4/8% Did the reasons that seemed to make 5/10 a sensible rule cease to operate?  Did more families with children move into the neighborhood, so it was necessary to slow the (otherwise legitimate) traffic a bit?

What is clear is that trading in anything but the most traditional ways in Europe is increasingly suspect.

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