Make your mind up!

Anne PlestedAccording to The Trade yesterday the European Parliament (EP) is considering forcing broker crossing networks to become systematic internalisers (SIs) or multilateral trading facilities (MTFs) due to fears of excessive fragmentation. The EP may limit the organised trading facility (OTF) category to non-equity instruments only.

Since the October 2011 publication of the MiFID II draft legislation included proposals for the new type of trading venue, firms have argued that the new OTF category does not fit the riskless principal/dual capacity model used by firms facilitating agency client order execution. Under the proposed new regime business models would all have to change!

Even the EP rapporteur for MiFID II questioned the need for OTFs at all! One of the few (if not the only) sectors to have embraced the OTF proposal is the Interdealer broker community, as OTFs would support their hybrid operating model of voice and electronic broking. The European Commission has said previously, when questioned, that the original driver for OTFs was for the derivatives market, as an equivalent to SEFs in the US, to guard against regulatory arbitrage.

If broker crossing networks all have to become SIs, and given that the current proposals do not impose the same market surveillance overhead on SIs (as they are not classed as a ‘trading venue’).

The question is which sector of the market can shout the loudest?

2 Responses to “Make your mind up!”
  1. Pamela Casey says:

    SI’s and OTF’s have different business models. An SI will match orders through its own account and an OTF simply finds opposing orders and matches it if possible before routing to the exchange. Depending on the investment firms flows, one or the other (or both) models may be beneficial to reduce operational costs or indeed improve execution quality for their clients.

    Those firms who cannot or do not desire to deal off their own account will not fit in the SI model. Is this the end for crossing of client orders away from the exchange?

  2. Anne says:

    Thanks Pam. I don’t think it is clear yet what the outcome of this debate will be. It does sound though that the EP are back-tracking on the original proposals for OTFs. The amendments to the text, based on feedback from the EP December questionnaire (and lobbying pressure), are scheduled to be presented before the end of April – so there are a couple more months for everyone to argue their corners.

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