The association of market makers warns of the flaws in the European ban on payment for the flow of orders


The Futures Industry Association European Principal Traders Association (FIA EPTA) welcomed the European Commission’s decision to ban payment of order flow (PFOF) under MiFID II, but warned of potential loopholes in changes.

Brussels has decided to ban the PFOF to “high frequency traders organized in IS [systematic internalisers]»On 25 November as part of its action plan for the Capital Markets Union (CMU). Under the changes, sites will instead have to gain a retail order flow by posting competitive pre-trade quotes.

In a follow-up statement, the FIA ​​EPTA said that the Commission’s definition o left big gaps around what is considered PFOF, how it is practiced and who can practice it. and subsequently left loopholes that would allow these practices to continue in the EU.

The association said it was “critical” that these loopholes be closed and suggested that the Commission advocate a ban on PFOF that encompasses all direct and indirect monetary and non-monetary incentives, including all execution scenarios and possible routing between all types of participants.

“In the opinion of FIA EPTA, these practices, which are observed in some Member States, constitute an inappropriate conflict of interest, which compromises fair competition between market players as well as best execution for end customers” , said Piebe Teeboom, General Secretary of FIA EPTA.

” These practices [PFOF] undermine EU investor protection standards and risk ultimately disadvantaging and, in due course, driving away even retail investors whose participation in European capital markets will be critical to their success. “

Elsewhere, the FIA ​​has expressed conditional support for the Commission’s plans to implement a consolidated band in Europe.

The European Commission announced last week the introduction of a single provider of real-time post-trade consolidated bands for each asset class. However, the FIA ​​EPTA said the scope of the derivatives band is unduly narrow and suggested that an equally comprehensive band as those proposed for stocks and bonds be implemented.

He also added that the Commission’s changes to bond market transparency – which include harmonizing the deferral regime and reducing post-trade publication deadlines – must include a general 15-minute delay as currently the changes. are ambiguous and risk creating an overly complex regime with cross references. ranging from 15 minutes to two weeks.

“This will also be the case for large transactions when they are implemented in conjunction with an effective volume masking regime, ensuring that liquidity providers are not exposed to undue risk and are always in a position to hedge effectively even after the deferral window expires since the market does not know the true size of the large trade, ”Teeboom added.

The Commission’s consolidated band proposals have received mixed reviews from various associations. Overall, the industry welcomes its introduction, but many have suggested improvements to the system proposed by the Commission.

The Association for Financial Markets in Europe (AFME) requested that the consolidated band for equities include pre-trade data, as well as post-trade data which the Commission suggested including and recommended that Brussels ensures the development of a consolidated band of obligations before acting on any modification of the post-trade transparency regime.

“This will avoid exposing committed liquidity providers to excessive potential risks, especially when trading illiquid instruments or transactions above a certain size, as if not properly accounted for, it may lead to less liquidity available to businesses and investors, ”said Adam Farkas, AFME. General manager.


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