MiFID's Dark-Trading `Loophole' Has New Stock Exchange Opponent

(Bloomberg) -- Deutsche Boerse AG has joined those criticizing a new type of trading venue being ushered in by Europe’s MiFID II rules.

Europe’s largest markets operator says it, too, wants regulators to strip the new stock-trading venues, known as systematic internalizers, of the ability to price stocks more flexibly than exchanges can. Critics of systematic internalizers, or SIs, have claimed that the pricing advantage could allow SIs to siphon away trading from public markets -- exactly the opposite of what was intended with MiFID.

Alexandra Hachmeister, chief regulatory officer at the owner of the Frankfurt Stock Exchange, said MiFID is unfair in that systematic internalizers don’t have to follow the same “tick-size” rules as everyone else.

“There are some loopholes still in the document” of MiFID’s rules, she said in a Bloomberg Television interview recorded on Nov. 8. “SIs still have the opportunity to somehow provide meaningless price improvement that gives them an advantage to lit markets that might allow them to capture a relevant part of the trading flow.”

Fellow stock-exchange operator Euronext NV and Markus Ferber, the European Parliament member responsible for shepherding MiFID II into law, have also spoken out against the tick-size price advantage.

Regulators have taken notice. On Nov. 9, the European Securities and Markets Authority proposed rewriting part of MiFID II to force systematic internalizers to follow the same rules as stock exchanges. A Deutsche Boerse spokeswoman said that the exchange backs ESMA’s plan.

SIs, which are dark venues because they can offer bespoke quotes and they don’t have to disclose order sizes, could have used MiFID II to buy and sell stocks at marginally better prices than other trading venues. That created a problem for the EU’s regulators, who aimed to curb dark trading under MiFID.

The tick-size difference has been controversial. XTX Markets Ltd., an algorithmic trader that will become an SI under MiFID II, predicted that dark trading of European stocks would triple over the next year or two -- the price advantage of SIs would push trading onto the new venues.

Hachmeister also discussed another sore point among those grappling with MiFID. She said regulators are debating how to handle one of the law’s most disruptive rule changes -- the requirement that traders and investors include personal information when they place an order. The personal-identification requirement is illegal in countries including Switzerland, where it is forbidden to supply personal data to a commercial organization.

“My understanding to this point is that the national competent authorities are jointly discussing solutions to this problem,” Hachmeister said.

To contact the reporters on this story: Will Hadfield in London at whadfield@bloomberg.net, Nejra Cehic in London at ncehic@bloomberg.net.

To contact the editors responsible for this story: Trista Kelley at tkelley2@bloomberg.net, Cindy Roberts

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