Importing US regulation is not a quick fix for European markets, participants have affirmed, suggesting that while a negotiated price waiver would improve transparency and execution, an order protection rule would add unnecessary complexities.
Respondents to the European Commission’s (EC) ‘targeted consultation on the integration of EU capital markets’ warned against the adoption of a US-style order protection rule in the region, stating that market fragmentation would bring high costs and low benefits.
In its response to the paper, Norges Bank Investment Management commented, “We fail to see obvious advantages in changing the European trading landscape to one where best execution is facilitated by a US-style order protection rule – i.e., a system where trades are automatically rerouted to different venues based on the National Best Bid and Offer (NBBO).”
“European markets are regionally fragmented. Forcing connectivity between regional venues that do not offer trading in the same shares would come at cost without immediate benefit.”
The European Principal Traders Association (EPTA) concurred, arguing that the introduction of such a system would undermine the goals of the savings and investment union (SIU), an ongoing priority for the region.
“Such a requirement would go beyond venues’ function as well as the concept of best execution in the existing EU regulatory framework. Issuers and investors would be better served by an environment that fosters competition and lowers barriers to access,” it stated.
Respondents also argued that trading venues should be able to benefit from a negotiated price waiver for negotiated transactions that take place with the assistance of a system or trading protocol that they operate. This is currently allowed in the US and UK, with platforms offering services like trajectory crossing.
Norges Bank Investment Management cited its own experiences with these mechanisms, stating that they help to reduce trading costs and improve execution quality.
“These mechanisms serve legitimate market needs, particularly for large institutional orders where minimising market impact is critical. Denying multilateral venues the ability to offer these innovations while allowing similar functionality through bilateral channels creates regulatory distortions that fragment rather than integrate European markets.”
EPTA agreed that negotiated trade waivers should be introduced, arguing that current restrictions are negatively impacting Europe – putting it behind global competitors and reducing visibility.
“One of the perhaps unintended consequences […] is that trajectory crossing services are still being offered in Europe in response to investor demand, but the activity is taking place off-venue in a less transparent and competitive environment,” it noted.
However, EPTA warned that practices must be put in place to prevent players from trading in ways that they cannot on-venue.
Before making definitive regulatory changes, it is essential to ensure more accurate post-trade flagging practices are adopted to enable market participants and NCAs to discern what kind of activity is taking place under this waiver.
“It is preferable for the waiver regime to be structured in a way that supports as much on-venue activity as possible and does not result in trading that would otherwise be suitable to occur on venue, taking place OTC.”
BlackRock added that bringing in a structural overhaul would cause more problems than solutions, increasing cost, adding complexity to supervision and increasing operational burdens.
READ MORE: Structural change won’t solve market fragmentation, industry bodies warn
It noted: “We recommend investing the finite resources of ESMA and national competent authorities (NCAs) in greater convergence and building common trust and confidence between NCAs. For the common rule book to converge in practice, we need a supervisory outlook with increased use of common supervisory actions and shared supervisory collaboration platforms.”
Norges Bank Investment Management agreed: “Our priority would be consistent application of rules across jurisdictions rather than any particular institutional arrangement. From our perspective as a cross-border investor, the most important outcome is that the same rules are interpreted and applied similarly across markets, reducing operational complexity and legal uncertainty.”
