Border politics

Anne PlestedThere have been a number of articles recently covering exchange and regulator concerns around the effective detection of market abuse in Europe. FESE has recently published a position paper on the review of MAD in which it encourages policy-makers to consider the issue of effective cross-border and cross-venue surveillance. Fragmentation of trading across several venues outside of the primary market calls into question who is responsible for the identification of potential abuse and who is responsible for supervising trading in any given instrument.  There is currently no official cross-border surveillance, apart from general co-operation, for regulators to detect or prevent market abuse. Meanwhile, trading firms are using SOR and strategies that require trading across multiple platforms. There have been calls for an independent supervisory body to take a central role in cross-market surveillance and ESMA thinks it could fit the bill: “…it makes sense to support any reinforcement of ESMA’s role in cross-border surveillance. We could have a centralised order book at ESMA which national regulators have access to…”. However, market participants are not so keen on more power for ESMA.  Another interesting dimension to the whole area of monitoring for market abuse would be cross-asset class surveillance, which neither FESE nor ESMA pick up on here but which would be a logical next step.

One Response to “Border politics”
  1. Christian Voigt says:

    Cross-border and cross-venue surveillance is definitely an interesting idea to deal with side effects of fragmentation. However, I’m a little bit worried that we will create a surveillance beast that no one can control.

    Let’s start with the argument that cross-venue surveillance system is more than just a consolidated order book for the sell-side. In contrast to existing consolidated order books, a surveillance system must incorporate all the different market models. Currently, we consolidate only across open limit order books and ignore smaller differences in market design. A surveillance system cannot do that. Firstly, it must consider all markets (not just the most relevant ones that have a very similar market model). Secondly, it must recognize all differences in market design (starting with tick size ending at priority rules). After all, market manipulation looks different in an order book with pro-rata matching compared to price-time priority.

    Furthermore, cross-asset surveillance multiplies the problem even more. Currently, there are 146 MTFs, and 93 Regulated Markets recognized by MiFID in Europe. Thus, the surveillance system has to connect to 239 different execution venues. If each venue has one release per year, the surveillance beast has to implement about 1 release per day. Most likely it would have to implement all releases in full, because any trading functionality could be used for market manipulation. Therefore, there is a huge risk that such a surveillance beast would become simply too complex.

    Finally, let’s assume that all of that works out. It’s quite likely that a lot of people will ask for a consolidated tape provided by that surveillance beast. After all, they have all the necessary data and could provide it low cost to the market. And then all of a sudden we introduced a consolidated tape just like in the US. Considering all of that, I wonder whether it might be better to stick to a decentralized solution and just improve the flow of information between surveillance units.

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