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Key Issues

Market-making obligations

One of the biggest risks for the markets, and greatest concerns across all market participants is how to ensure a supply of liquidity in 5 years’ time.

Without market makers, investors would not be able to buy and sell stocks whenever they want, at the price they want, on the exchange they use every day. Regulation must ensure that liquidity remains available by providing the necessary incentives to market makers and ensuring that obligations do not conflict with prudent risk management procedures. Failure to do so may mean that the markets consequently become less liquid, and therefore the quality of the markets will be reduced.

High frequency trading

FIA EPTA has taken a consistent view that adopting a formal definition of HFT is neither practical nor desirable for formulating regulation because a clear distinction between HFT and algorithmic trading cannot be made. This is because over time, FIA EPTA expects participation and automation in the market to grow along with the sophistication of the participants, who will increasingly fall under the HFT regulation until all such participants have HFT capability. Given this, FIA EPTA believes it is better to establish broad principles to capture the entire universe of automation risk.

We believe that regulation should derive from the actual behaviour of market participants and should apply equally to all market participants based on like behaviour, regardless of their legal form or regulatory status, the market segment in which they operate, how they access the markets, or the speed at which they trade.

Capital Requirements

The current capital requirements regime (CRR) was designed for banks, and fails to distinguish between firms by activity or size, meaning that it has a disproportionate impact on proprietary trading firms that serve as Europe’s market makers. Independent market making firms are therefore adjusting their business models and rethinking how they will manage their capital.  As a result, we have already seen many firms cut down the number of products and markets they trade (and therefore supply liquidity in), and we expect this situation to get much worse as we get closer to the 2017 MiFID II deadline.

Unless something is urgently done to mitigate this unintended impact, we are concerned there won't be enough market makers left to fulfil MiFID II's obligations.

 

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