The Association for Financial Markets in Europe (AFME) has expressed concern around market liquidity in the run-up to MiFIR. review.
As a result, it has advised negotiators at European Union trilogues for the review to consider the impact that MiFID could have on the attractiveness of Europe’s capital markets.
After years of debate and discussion, the European Council, Parliament and the Council of the European Union is expected this week to set out new MiFID regulation around double volume caps (DVCs), the consolidated tape, midpoint trading and payment for order flow (PFOF) among other topics.
Research from the organisation has shown European equity markets to be less dynamic and liquid than those in the US, with the latter’s turnover ratio rising by 40% between 2016 and 2022 and the former’s remaining static.
AFME attributes the differences due to the bloc’s nationally fragmented equity markets which operate under a regulatory framework that limits choice and introduces even more complexity through arbitrary restrictions that deter liquidity.
It said that the European equity market is less than half the size of the US but it has three times as many exchange groups and over 10 times as many for listings.
In addition, the region is home to more than twice as many exchanges for trading as well as roughly 20 times as many post-trade infrastructure providers.
It noted that this complexity is likely to be one of the factors motivating European high-growth companies to list outside the EU.
AFME explains that this is due to nationally fragmented equity markets across the EU, which use complex regulatory frameworks and deter European high-growth companies from listing within the EU.
As a result, the trade group is calling on policy makers to ensure a variety of trading mechanisms remains in place to maintain a healthy and stable market.
It also called for a real-time pre-trade consolidated tape to be implemented to reverse the “worrying trend” in EU equity market turnover.
Last December, AFME said that “more ambition” is needed in the European Council’s approach toward a properly constructed CT for real-time pre-trade as well as post-trade.
“As inter-institutional negotiations begin, AFME is urging policymakers to keep the attractiveness and liquidity of EU markets at the forefront of its considerations,” says Adam Farkas, chief executive at AFME.
He adds, “To do this, first, we need a meaningful consolidated tape. This means a real-time, pre-trade tape to help overcome the current fragmented picture of the EU’s liquidity and provide a much-needed window where all users of capital markets can have a complete view of that liquidity. This will also help reinvigorate lacklustre European markets, creating further opportunities for both investors as well as companies seeking to list in the EU.
Second, we must ensure that sufficient choice in trading mechanisms remains to attract investment within and into Europe. Here again, the EU’s geographically fragmented equity markets and its complex regulatory framework risk holding the bloc back from making policy choices that could benefit the EU overall.”
Santiago Ximénez, director general at BME Market Data, part of SIX, says, “The push to improve the quality and accessibility of market data with regards to a consolidated tape is very much welcome. There is no doubt supplying reliable and high-quality market data is paramount to delivering a consolidated tape efficiently, and to the highest operational standards that offer a complete picture of the liquidity.
The industry needs to continue to collaborate with regulators to develop a comprehensive, complete, standardised, and consistent source of market data for investors.”
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