Euronext outlines key stumbling blocks in MIFIR Review ahead of European Trilogue meeting

By Luke Jeffs

The European Commission, European Parliament and European Council will start on April 18 their Trilogue meeting to try to reconcile their different positions on some key aspects of the regulation of European market structure.

The MIFIR Review covers key issues such payment for order flow, systematic internalisers and the European consolidated tape. Euronext has been vocal in its views on many of these issues and has outlined again its position ahead of the crucial meeting on Tuesday.

Nicolas Rivard, head of advanced data services at Euronext, told Global Investor the MIFIR Review presents an important opportunity to review the European capital markets regulatory framework and strike a better balance in Europe between competition, transparency and fragmentation.

Rivard said there are positive elements in each of the Commission, Parliament and Council texts but there are equally proposals about which Euronext is concerned.

A ban on Payment for Order Flow

Euronext’s position on payment for order flow is simple: the practice should be banned.

Rivard said: “Euronext has always been clear that to ensure that retail investors get the best services that avoid conflicts of interest, the best approach is a full ban on Payment for Order Flow (PFOF). A ban on payment for order flow is the only way to secure investor protection. The European Parliament, Council and Commission agree on the principle of a ban on PFOF but the Council is proposing an opt-out for members states.

Systematic Internalisers: advocating for consistency across non-lit and lit venues

The second important issue addressed differently by the three texts is the balance between lit and dark trading, specifically systematic internalisers’ obligations with regard to mid-point trading.

“On this, we think again that the approach of the European Parliament makes sense. Although the initial approach of the Commission was interesting, it is clearly much more restrictive in terms of what the SI can do. The Parliament has come up with a compromise,” said Rivard.

Euronext accepts that systematic internalisers have value in specific cases. But the group feels the European rules should be consistent across non-lit and lit venues.

Rivard said: “Trading at mid-point in legitimate circumstances is fine but assessments demonstrate that it should be limited for small orders. The simple reason is that you cannot trade at mid-point on price-forming markets and we believe this should apply also to systematic internalisers, so it should be limited to larger orders above a certain threshold.”

Consolidated Tape: Euronext flags risks with pre-trade data used in the equity tape

The last and perhaps most contentious issue up for debate in the coming weeks is the European consolidated tape, a single record for European share prices.

Euronext view is priority is to have a post-trade tape for bonds. But the divisive issue is the level of pre-trade data used in the equity tape. Both the Council and Parliament back pre-trade data in the equity tape, but Euronext has serious concerns about the Parliament proposal which it sees as “distortive”.

Rivard said: “The Council’s consolidated tape proposal is a post-trade real-time tape with a snapshot of pre-trade data on each trade. We can call it an execution tape that provides market participants with a price and volume across all execution venues. So that basically gives investors a real-time prices across all type of European venues and a quasi-real-time view of liquidity on lit markets because every few seconds you would have a quasi full update on the market.”

“This tape covers all the non-trading use-cases put forward by the European Commission and this is the proposal that we endorse. We believe it will bring a lot of value and transparency to the market, achieving the key goal of the MIFIR review.”

Euronext was in February one of 14 European exchange groups to sign up to a joint venture (JV) to participate in the selection process for the provision of the European consolidated tape. Other members are Deutsche Boerse, Nasdaq, SIX Group and Wiener Boerse.

Rivard said: “We have carried out a deep assessment, and we have evidence there will be an important demand for this tape based on the revenue we generate from various use-cases. We believe there will also be a number of candidates to run the tape of which the JV we are creating with 13 other exchanges is one.”

Euronext points out that the European Parliament proposal for a real-time pre-trade tape with five levels of depth, would drive trades away from lit markets.

“The trading tape put forward by the Parliament is an attractive simple story but with foreseeable side-effects on market quality. If you look at the US, when you have a trading tape, you basically favour non-transparent markets and non-transparent trading. That's because the pre-trade real-time tape becomes a reference benchmark and, as it is in the US, trading at the reference price is not trading on a lit market nor is it contributing to price formation,” said Rivard.

Euronext also has concerns that the Parliament proposal would disadvantage retail traders who can be more easily arbitraged by algorithmic traders.

Rivard said: “At the end of the day, that tape is only going to contribute to less transparent trading, to the detriment of transparency and fairness of treatment across all participants.

“In our view, the Council execution tape covers all of the relevant use-cases whereas the European Parliament tape covers in addition trading use cases which we understand was not the intention and this will have a negative on the market particularly for smaller or retail investors, and would contradict the goal of having more transparency.”