The European Principal Traders Association has responded to the Financial Conduct Authority regarding its consultation paper on the systematic internaliser regime for bonds and derivatives, including a discussion paper on equity markets (CP 25/20).
The response highlights EPTA members’ support for the SI regime for all asset classes, particularly equities, and calls for it to be retained for bonds and derivatives. Dismantling the regime now would have cost implications related to changing fields in trade and transaction reporting systems, among other things, which are not outweighed by the benefits of removing it.
EPTA members see SIs as a positive construct that bring transparency, along with more formalised and democratic access, to bilateral risk facilitation. EPTA supports a market structure where trading takes place, to the greatest extent, in an organised environment and considers it essential to optimise transparency to facilitate efficient price formation and enable best execution in a competitive execution market that helps end-investors.
Equity Markets
EPTA members strongly support the application of pre-trade transparency as a key mechanism to ensure efficient price formation and liquidity aggregation that enables best execution for end-investors. UK equity markets would benefit from the introduction of a comprehensive pre-trade Consolidated Tape, which would support the above goals while contributing to market resilience in the event of an outage.
EPTA recommends policy initiatives to support lit markets and the growth of capital markets more broadly. At the same time, it is important that nuance is recognised. Not all activity taking place away from a Central Lit Order Book is “dark”, nor should the contribution of post-trade transparency to sound price formation and discovery be undervalued. CLOBs are a fundamentally important reference price and should be supported by regulation; however, prescriptive regulation that seeks to curtail dark trading or mandate where trading takes place will not effectively support healthy lit markets.
EPTA members thank the FCA for its consideration in the discussion paper of our Mind the Transparency Gap paper, which proposes to give a better picture of market activity by the reporting of addressable liquidity from brokers’ internally sourced hedging activity. EPTA notes that this scenario resembles that of the Request for Market Data (RFMD) described in the FCA’s discussion paper. EPTA estimates that reporting this activity could increase reported equity volumes by at least 10-15% – helping mitigate the perception of a liquidity crisis in equity markets.
Read the consultation response in full here.
