Avenues, the newly launched Alliance of Independent Advisors to Financial Markets, has claimed that the fragmentation of exchange trading and data that has followed from MiFID has increased the potential for market abuse.
According to the advisory group, although MiFID aimed to create competition amongst exchanges, the 2007 directive has created an environment where no single exchange can monitor the activity on any stock they are responsible for.
Avenues also states that MTFs, some of the fasted growing trading facilities to emerge after MiFID, do not invest in comparable surveillance infrastructures and that internal broker-dealer crossing networks are in effect unregulated by the 2005 Market Abuse Directive (MAD).
Avenues monitored trading in Vodafone on a random week in mid-February. The London Stock Exchange carries out surveillance on the activity in Vodafone transacted on its platform, but during that week it saw less than 33% of the total trades, with some 18% being done on MTFs and almost 50% in dark pools, OTC, or on systematic internalisers.
Steve Leegood of Avenues explained, In that one stock in one week 800 million shares worth almost 1.2 billion were traded off the LSE. With current systems there is absolutely no way that any exchange can properly handle the surveillance of total market activity to detect abuses when the bulk of trading in that stock takes place elsewhere. And regulators concentrate on monitoring reported trades, not the full detail of the development of the orderbooks that preceded the trades. Furthermore, with electronic trading, the potential for abuse has also increased. For instance the FSA’s Market Watch recently raised the issue of layering or spoofing the orderbook, stating that, exchanges and MTFs will have procedures in place to prevent this activity, but if youre only seeing a third of the activity, or not looking at all the orderbooks, how can you properly deal with these problem areas and ensure investor protection?
Given this apparent lack of protection we would expect buy-side players and investors to be demanding reassurance that their trades have been executed at fair prices, just as they now ask whether they achieved best execution. Even if best execution is achieved it may be at unfair prices as a result of market abuse.
“There is a potential scandal in the making here, and we want to work with the industry to prevent it becoming an actual one. adds Leegood.
Avenues is formed by four advisors; Bryok, BTA Consulting, Capstan Consulting, Golden Advisors