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Fese: OTC uncertainty 'unacceptable'

Friday 19 August 2011 - by Andrew Hickley

Uncertainty about the number of trades that take place in over the counter markets has been branded "unacceptable" by the Federation of European Securities Exchanges.

Replying to an International Organization of Securities Commissions consultation on the impact of technological changes in the market, Fese sats that under Mifid, OTC trades were intended only for large orders that would otherwise affect market prices, with the lack of transparency now disadvantaging investors.

Between 16 to 40 per cent of the number of trades occurring in Europe are estimated to have been conducted over the counter. While the actual figure remains unclear, Fese says that the Committee of European Securities Regulators' declaration that 37.8 per cent of all equity trades are OTC is the "best available figure".

"The uncertainty over what is contained within this figure (genuine trades as well as duplicate, technical trades, etc) is unacceptable," it says in the letter, unveiled on Friday.

Because OTC trading is exempt "from most Mifid rules" that apply to regulated markets, multilateral trading facilities and systematic internalisers, "namely transparency obligations and market surveillance", concerns are raised "about the effect this level of trading has on price formation in not only lit markets, but also properly regulated dark trading venues", it says.

The trade body goes on to caution against the mandatory use of mechanisms such as circuit breakers when markets become volatile.

The group argues that exchanges already have strong risk controls in place. Mandatory use of these safeguards may not be appropriate for all products and services, it says, and exchanges should instead be encouraged to implement trading controls that best suit their markets and operating systems.

It also says it has no complaints towards high frequency trading as a technology, arguing there is "nothing intrinsic to HFT" that leads to market abuse.

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