THREAT OF TICK-SIZE WARS PROMPTS ESMA RETHINK.
By Flora McFarlane.
Regulators are consulting on changes to share-trading rules to prevent an exodus of equities trades from multilateral venues to systematic internalisers (SIs), which could benefit from the capacity to price trades at smaller increments, under MiFID II.
The proposed change to Regulatory Technical Standard (RTS) 1 proposes a clarification that SI quotes should “reflect the price increments applicable to EU trading venues.”
Questions had arisen over the potential disparity between prices quoted on an SI and other markets. The SI quotes do not have to reflect the tick sizes (the minimum price increment in the limit order book) applicable on-venue to the quoted financial instrument.
Prices and quotes on multilateral trading facilities (MTFs) and regulated markets (RMs)for shares, depositary receipts and certain exchange traded funds (ETFs) always have to comply with the minimum tick size regime of MiFID II, but SIs do not. ESMA seeks to address the concerns that there would be an uneven playing field as a result of different rule.
Tick size wars have been a constant concern in the US and Europe since competition began to move trading away from regulated markets in the early- to mid-2000s. In 2010, when the European Union reviewed MiFID I it also raised concerns regarding tick size rules.
A report by academics at the University of Bergen and the University of Stavanger last year looked at the 2009 activity of trading venues Chi-X, Turquoise and BATS Europe, on reducing their tick sizes for stocks listed at the Oslo Stock Exchange (OSE). That led to the OSE reducing its own tick sizes. The paper found that ﬁnd that markets with small tick sizes capture market shares and that tick reductions negatively affect the stock liquidity in markets that keep larger tick sizes.
The current consultation sets out that in order to ensure that quotes reflect market conditions, they may need to be linked to the minimum tick sizes that trading venues are held to. Although the concern is that the tick size regime may be excessively favour SIs, some market commentators believe they are still highly competitive.
Duncan Higgins, head of electronic sales at agency broker ITG says, “The changes proposed in the consultation aren’t a surprise to us or others in the market. SIs will still be able to improve on size or price and we will be connecting to a range of SIs of different flavours.”