Increasing Stability and Reducing Risk
FG: What essential characteristics does a European consolidated tape need to be effective?
EV: The implementation of MiFID resulted in a fragmented and less transparent trading universe, in terms of liquidity as well as information. After having left data consolidation to market forces without any visible result, legislative action is now required to cope with these drawbacks and the revision of the directive is an opportunity not to be missed.
Creating a viable consolidated tape (CT) in Europe is key to determining a price of reference for duly applying best execution rules, or proper circuit breakers on all trading venues. The European Commission proposes the creation of a CT provider status, in charge of ensuring the consolidation of post-trade data. However, the model does not require that the information provided is exhaustive. It does not guarantee the consolidation by a single body of all the transaction data in a specific financial instrument, therefore it will only partially remedy the current fragmentation of information.
A European consolidated tape must be centralized and comprehensive in order to fully consolidate information and be effective, with strong involvement from market authorities and ESMA. As a minimum, there should be one tape that consolidates all post-trade data on transactions made in a financial instrument in the various trading spaces (exchanges, MTF, OTF and OTC). It is necessary to supervise the creation and operation of a single comprehensive consolidated tape for equities, through minimum specifications established by public authorities.
FG: Is there a model that the Commission should consider for pan-European circuit breakers and algorithmic monitoring?
EV: In Europe, the MiFID review is an opportunity to tackle the issues raised by the rapidly evolving market technology and the European Commission’s text proposals are to be welcomed in this field: they rightly frame the systems and controls to be put in place in an automated trading environment, as well as foresee tools required to intervene further on the market structure. In particular, it is important for the regulators to gain access on request to all meaningful information on the trading algorithms used by market participants.
In order to create a comprehensive regulatory framework to ensure market efficiency and enhance investor protection, ESMA has a key role to play in fixing parameters such asthe tick size and fees paid by every market participant for each order modification or cancellation – matters that will be best dealt with through binding technical standards, in close consultation with the industry.
Regarding circuit breakers, reaching a certain level of harmonisation amongst trading venues is important, even though regional and local triggering events must be distinguished. The optimal solution would be to have a common reference price on the basis of which static circuit breakers would be determined, to be enforced on all trading venues.
FG: Why is it essential that third party countries have access to the European financial system and vice versa?
EV: Cross-border financial flows are vital – not only within the European single market – but also between Europe and other major financial centres. European businesses need access to capital and the services provided by third country firms. We do not support protectionist reflexes. On the contrary, we aim to encourage competition, but this must take place on a level playing field, which requires clarification and harmonization of the conditions to be met by third country firms in order to access EU investors.