CESR's March Toward Mifid 2

One of our sibling publications, International Custody and Fund Administration, reports that the Committee of European Securities Regulators (CESR) will take an extremely critical look at the future of dark liquidity pools and multilateral trading facilities (MTFs) when the body meets on July 16 to discuss the next version of the Markets in Financial Instruments Directive (Mifid).

One thing is for sure: The future of European dark liquidity pools is in serious doubt. Depending on which volume figures you trust—those of the Federation of European Securities Exchanges (FESE) or of the banks—regulators have a serious interest in reining in dark liquidity. These new venues have basically circumvented the role of systematic internalizers within Mifid.

On the other hand, the rise of MTFs set off the biggest technological arms race among European trading venues and improved the efficiency of the markets and tightened spreads. Since these new markets came online, every exchange wanting to protect its market share has been throwing time, talent and capital at its trading infrastructure non-stop.

But how much competition will the markets continue to see from new MTFs? Assume that an MTF needs to capture about 8 percent of total market volume to cover its operating nut. That doesn't leave much space for a wide array of viable MTFs in the market.

Yet the market rewards those that build the better mousetrap and we are sure to see more consolidation as other exchanges follow the London Stock Exchange's (LSE's) lead and purchase their competition. The market will also see a few boutique MTFs pop up here and there serving specific niche needs, but they won't be competing against their pan-European brethren.

The issue that CESR truly needs to hash out in a few weeks is the other half of the equation—clearing, or to be more specific, clearinghouse linkages. This is currently the largest stumbling block in further improving market efficiency. As long as certain issues only clear through specific clearinghouses, it is difficult for various exchanges that have different clearing arrangements to attract liquidity in those listings.

If CESR decides to once again not address this issue in the upcoming Mifid 2 legislation, we know that the European Commission feels that the European markets have become integrated enough.