MiFID Implementation Consultation: A Rocky Start

rocksThe European Securities and Markets Authority kicked off the consultation process for the implementation of the revised MiFID II, Thursday, May 22.

Amused techies noted immediately in twitter that, soon after release of the pertinent papers, the MiFID website went down. Whether this was a coincidence or the result of the traffic the news drew: it can be taken as evidence that the consultation is off to a less than auspicious start.

Hannah Randall tweeted, “European market structure types” never not deeply cool.”

The Markets in Financial Instruments Directive as amended will significant changes, including transparency requirements, the mandatory movement of derivatives trading onto exchanges, strengthened protection for retail investors, and new requirements for algo and high-frequemncy traders.

The new consultation paper is here and the discussion paper is here. There will be public hearings in Paris July 7-8, and there is a response deadline of August 1st.

If you’d like to review some of the earlier discussions of MiFID at AllAboutAlpha, you might start here, here, and/or here.

Micro-Structural Issues

Let’s look, today, at what ESMA is calling the “micro-structural issues.” It defines HFT as “a special class of algorithmic trading in which computers make decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe and of taking a decision in relation thereto.”

HFT so defined has or will have two sorts of regulatory consequence: it brings the traders under the MiFID umbrella, so that they have to be authorized as investment firms under Article 2(1)(d)(iii). Furthermore, it carries with it record-keeping requirements. MiFID requires that an investment firm engaged in such behavior “shall store in an approved form accurate and time sequenced records of all its placed orders, including cancellation of orders, executed orders and quotations on trading venues.” These records shall be available to the national competent authority on request.

Does that definition require further definition? Supposing that it might, ESMA considered two different, mutually exclusive, clarifications. Option 1 would identify HFTs based on whether the infrastructure is designed to “minimize latency and the capacity to transfer data to the venue.” The identification of the pertinent parameters is straightforward, such as the computation of the number of intra-day messages.

Option 2, on the other hand, would focus on the median daily lifetime of orders. This “relates to a calculation that trading venues regularly undertake nowadays,” which will make it convenient. Also, the second option – unlike the first – will not have to be “revised frequently so as to keep pace with the latest technological developments.”

So for the purpose of the consultation process, interested parties are asked the following:

  • Which would be your preferred option? Why?
  • Can you identify any other advantages of the options put forward?
  • How would you reduce the impact of the disadvantages identified in your preferred option?
  • If you prefer option 2, please advise ESMA whether … you would take into account only the orders sent for liquid instruments or all the activity in the trading venue.

One point on which ESMA seems to have made up its own mind pretty firmly is that HFT will be identified “at the member or participant level.” Thus, “if a member’s or participant’s strategy falls under the definition of high-frequency trading strategy in one trading venue, that member/participant should be considered as subject to MiFID provisions across the EU.” [Italics added.]

They ask a broad-brush question about this, “Do you agree with the above assessment? If no, please elaborate.” That is the kind of question authorities ask when they are required to ‘consult’ but when they are pretty sure, “yes” is the only reasonable answer.

Direct Electronic Access

DEA is another “micro-structural issue” concerning Europe’s markets. According to an explicit definition in MiFID II, the term refers to an “arrangement where a member or participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue.”

This is related to, though not quite the same as, what IOSCO calls Automated Order Routing. Other terms within the kinship group are “direct market access” and “sponsored access.” In Venn diagram terms, ESMA seems to see AOR as a smaller circle entirely included within the larger circle known as DEA.

The questions for consultation, then, include whether there is “any other activity that should be covered by the term “DEA”, other than DMA and SA?” and whether in particular, AOR should be considered as a part of that whole.


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