Norges Bank Investment Management (NBIM) has told Europe’s markets watchdog that its ideas for making the process of a lesser-used type of auction more transparent could skew equities prices and should be dropped.
Responding to the European Securities and Markets Authority’s (ESMA) consultation on the review of transparency requirements under the Markets in Financial Instruments Regulation (MiFIR), NBIM took aim at the ideas ESMA has floated to clarify the pre-trade transparency requirements for new types of trading systems such as frequent batch auctions (FBA).
In a letter to the European body, Emil Framnes and Vegard Vik, respectively global head of equity trading and transition and special adviser at NBIM, wrote: “We believe FBAs serve a clear purpose in the market and that current pre-trade transparency regulation is adequate and efficient.”
ESMA launched the consultation on the review of the regulatory technical standards – RTS 1 equity, and RTS 2 non-equity – on transparency requirements under MiFIR, addressing topics that do not require a prior change of MiFID II/MiFIR.
NBIM, which manages the NOK11.4trn (€1.15trn) Government Pension Fund Global (GPFG), said in the letter that high quality markets allowed for efficient trading in size.
“Trading venues that operate under pre-trade transparency waivers and auction processes on regulated markets can help institutional investors like us access more natural liquidity and limit the cost of equity trading as measured by implementation shortfall,” the NBIM pair wrote in the letter.
“Limiting the cost for institutional investors trading in European equities, should be a regulatory concern for ESMA,” they noted.
The introduction of FBA in European markets had been an important development, they said, and an example that constructive innovation could take place within current regulation.
Though their overall transaction volume was quite limited as a share of overall trading volume, Framnes and Vik said: “FBAs allows for a more managed disclosure of trade intentions and allows for patient execution close to mid prices, making them more important to us than their overall volume share may indicate.”
These auctions ran in parallel with the continuous order book, they said, unlike the periodic auctions at open or close.
“We are concerned that requiring further pre-trade transparency, in addition to the indicative price and indicative volume available at matching under current regulation, will lead to adverse price moves on the continuously-traded lit market,” they said.
Low latency market participants would reflect transparent order imbalances in the lit market, the pair added, and reduce the probability of uncrossing in the auction.
“The main effect of the alternatives put forward by ESMA will be to undermine FBAs and reduce optionality and competition in the market,” they said.
Apart from the topic of clarifying pre-trade transparency requirements for new types of trading systems, the review also includes the subject of providing more clarity on non-price forming transactions and their reporting – which ESMA said would help obtain a better picture of the actual split between lit and over-the-counter trading – and a recalibration of the regime for commodity derivatives to give better tailored transparency requirements for such instruments.
The consultation period ended on 1 October.