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  • 2011/10/26
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MiFID II ahead Markets on an increasingly unequal footing as a result of fragmentation

Crédit Agricole Cheuvreux publishes its September Market Indicators, produced in conjunction with TAG.
Regulation: MiFID II and MAD II proposals unveiled
- The European Commission's proposal for MiFID II consists of two documents, the "Regulation" section, to be applied immediately by all countries, and the "Directive", which will benefit from an adaptation period.
- The new Organized Trading Facility (OTF) status has been created. This offers a regulatory framework for every trading platform that is not defined as a Systematic Internalizer. It is highly probable that BCNs (Broker Crossing Networks) will have to ask for this status. The exception related to pre-trade transparency that enabled mid-points to emerge is called into question without being removed entirely.
- The European Commission (EC) has committed to taking action on a number of key elements of the market microstructure that were absent in MiFID 1: tick size, circuit breakers, order cancellation ratios etc..
- Various statuses aiming at regulating the publication of a "post-trade consolidated tape" are set out in the documents. However, the EC does not place any constraints on the industry for creating this tape nor does it provide any advantages for its potential provider.
- Whilst HFT is not directly addressed in the directive, the algorithmic trading side (including non-proprietary trading) will be controlled.
- The MiFID II and MAD II (Market Abuse Directive) proposals should be considered in conjunction with the EMIR project.
LMIs: the current state of fragmentation
- The FTSE 100 is unsurprisingly the most fragmented of the six major European indices.
- The London Stock Exchange continues to lose ground and fell below the 50% threshold on several days in September.
- The BEL20 appears in second position, partly thanks to two high-turnover stocks: GDF Suez and Anheuser-Busch Inbev.
- The two least fragmented indexes are the DAX30 and SLI30.

Chi-x: more like a regulated market

- On bid-ask spreads, Chi-X shows better figures than the primary markets on almost all indices.
- With regard to the DAX30 and FTSE 100, the spread figures are consistent with the percentage of time spent at the EBBO.
- The number of trades on Chi-X has been moving towards levels on Xetra and the London Stock Exchange for some time now.
- In September, 15 stocks on the FTSE 100 saw Chi-X make more turnover than the LSE did across one or several days.
Update on mergers
- Doubts have arisen over both the major mergers underway: notably derivative and clearing concerns for NYSE Euronext-Deutsche Börse and competition issues for BATS-Chi-X which has still received provisional approval from UK competition authorities (their final go-ahead is expected on 2 December).
- However, NYSE Euronext-Deutsche Börse has benefited from the support of the German regulators, and only needs the European Commission to approve its merger. During a Commission hearing, GETCO stated that it would help out any newcomers should the BATS-Chi-X merger reduce competition.
- Moving to a silo organisation, LSE is in talks to acquire LCH-Clearnet but has not yet finalised the deal. This is a first step towards consolidation among clearing institutions following the fragmentation phase when venues successively announced the inter-operability of their clearing systems.

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