Wave your waivers goodbye

Since the introduction of MiFID in 2007 the concept of the pre-trade transparency waiver has been widely accepted and applied. However, following the latest regulatory discussions, there is a danger that we may have to wave goodbye to some of these waivers with MiFID II. It seems that the regulators feel that the existing waivers are interpreted too loosely and inconsistently across Europe, ultimately deterring price discovery.

Currently MiFID acknowledges four types of waiver with different possible applications in financial markets.

There is industry and regulator consent that the Large in Scale waiver should stay, while the others, especially the Reference Price Waiver (RPW), are under scrutiny.

In order to qualify under the RPW, a matching engine should not determine its own prices, but rather use a widely available reference price (e.g. mid-point of the primary market). AFME recently published a briefing note on this topic, arguing that the RPW is particularly crucial for institutional investors as it protects wholesale traders against market impact. AFME argues that removing the RPW will increase execution costs and bring no benefits to investors. BATS Chi-X Europe also supports the use of RPW as debated in a position paper. Additionally, BATS Chi-X Europe makes a strong case in favour of the Negotiated Trade Waiver, as this allows for moving OTC volume onto trading venues – an argument that ranks highly with any regulator thanks to the G20 commitment in Pittsburgh.

The four existing pre-trade transparency waivers certainly add benefit; they are legitimate exceptions in scenarios where trading would not be possible otherwise. But, are there potential negative effects? A dark pool that grows at the expense of lit books and decreases the quality of its own reference price is in no one’s interest. However, price discovery is a highly abstract concept and, in the absence of clear and precise measures, regulators might choose to ban those waivers that are important to the functioning of the market.

3 Responses to “Wave your waivers goodbye”
  1. David Pearson says:

    The removal of the Negotiated Trade Waiver would leave the UK Retail Service Provider (RSP) model in a questionable state. The generic Request for Quote model is acknowledged by MiFID as fundamental to the trading of illiquid securities. The waiver allows the RSP model to continue as on-exchange off-order book transactions, but it includes the liquid securities also. If the waiver goes, how will the current RSP model survive? A significant percentage of UK trading, and nearly all UK retail stockbroking, is handled using the RSP model. The consequences need to be thought through, and ideally before MiFID II gets signed off.

    • Christian Bower says:

      David, exactly right and I have spoken to virtually every responsible manager at virtually every stock broking firm in the UK and very few of them either accept this situation or even understand the threat. Heads are firmly in the sand and the proposal that they will need to do something more with an order than send it down a pipe to the RSP network is so overwhelming that even the simple processes of capturing the spread and increasing profits by crossing is not to be considered. The current draft is a game changer and I have proposed hybrid books, agency only owned pools and many other deviations as possible future proofs but there is a distinct lack of will or urgency. I suppose the retail market across the EU does well enough getting executed on exchange and perhaps the same can happen here.

  2. Christian Voigt says:

    The most recent MiFIR draft from the Council calls for a minimum size threshold applicable to the Reference Price Waiver. This additional threshold should be set at levels lower than the ones for the Large in Scale Waiver.

    The Negotiated Trade Waiver and the Order Management Waiver are mentioned explicitly in Article 4. It seems that the Council aims only at modifying the RPW.

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