Market outages have received considerable attention in Europe in recent months. Despite European trading venues operating in a competitive environment since the introduction of the Markets in Financial Instruments Directive (MiFID I) in 2007, outages at primary markets have resulted in the cessation of essentially all trading activity.
This has raised concerns about the resilience of European markets. Why does trading stop rather than migrate to alternative trading venues? And what needs to be done to ensure that this not recur in the event of future primary market outages? A recent report investigates these issues in two ways.
First, researchers undertake detailed, empirical analysis of trading data, using the October 19 Euronext outage as a case-study. Second, they conduct structured interviews with buy- and sell-side firms across Europe to understand experiences of market outages. Based on this research they developed recommendations for reforms across four key areas.
Areas for reform
Empirical analysis and interviews identified five areas where reforms should be considered:
- Improving communication standards;
- Ensuring resilient benchmark prices;
- Creation of a consolidated tape;
- Improving post-trade interoperability; and
- Initiatives to promote trading during a primary market outage.
There is near-unanimous agreement that there need to be reforms to improve venue communications and to ensure that there is a resilient process for determining benchmark prices. While there is also support for the creation of consolidated tape and more post-trade interoperability, there is less consensus on whether this would solve the outage problems.
There exist diverse views on how to best address the absence of trading during primary market outages, ranging from no further action is required through to either or both continuous and call auctions need to be reliably restored. Opinions diverge on whether these issues can be addressed through market-led solutions or whether they will need regulatory intervention.
Researchers explore these areas of proposed reform, and identify where they think a market-led solution may work, and where regulatory change may be necessary. The greatest difference of opinion relates to how much reform should be undertaken to ensure trading continues in the event of a primary market outage.
The study is sponsored by Plato Partnership with assistance from its members, EFAMA (European Fund and Asset Management Association) and BVI (German Investment Funds Association), Edward Monrad (Optiver) as well as other members of the buy- and sell-side community. BMLL provided data.