November 15, 2017

By Viren Vaghela

Stock exchanges have demanded a change to Europe’s MiFID II rules that they claim will give an unfair advantage to those outside European Union borders.

Venues including the SIX Swiss Exchange AG can price its stocks more flexibly than EU-based exchanges once MiFID kicks in on Jan. 3, London equity venue Aquis Exchange Ltd. said in a letter dated Nov. 14 to the European Commission, which was seen by Bloomberg News and confirmed by Aquis. Cboe Global Markets Inc.’s European exchange also complained, saying the pricing rules mean Switzerland could unfairly siphon off equity trades from EU exchanges.

Representatives for the SIX exchange did not respond to a call and emailed request for comment.

While the Swiss market is outside the EU, it is home to some of Europe’s biggest stocks, including Roche Holding AG, Nestle SA and UBS Group AG. Under MiFID rules, the price flexibility, or “tick size,” is determined by the average daily transaction number on the largest venue — which is Cboe Europe. However, the SIX Exchange is excluded, even though it has the highest trading volume.

“The requirement to consider only EU-based markets when determining the most relevant market in terms of liquidity may disadvantage EU venues in their ability to provide effective competition for trading in non-EU securities,” said Aquis’s letter.

Several stocks in the Swiss Market Index and over half the stocks in the SMI’s mid-cap index will be affected as they have more trading volume on the SIX, Nick Dutton, head of compliance at Cboe Europe, said in a telephone interview. If the rules aren’t altered, business will likely “move out of the EU and into Switzerland,” he said.

“This becomes self-reinforcing, because if they have a tick-size advantage they will likely get more flow due to MiFID best-execution rules, and this, in turn, will lead to tighter pricing,” said Dutton.

The tick-size issue has been controversial for other trading venues. After complaints from exchanges, the European Securities and Market’s Authority last week proposed closing a MiFID loophole that allows venues known as systematic internalizers, or SIs, to price more competitively than exchanges can.

In its letter, Aquis asked that it be allowed to follow the same tick-size regimes as non-EU venues. “The European Commission and ESMA need to work together really hard ahead of the Jan. 3 deadline to ensure that the playing field is fair and level for all participants,” Alasdair Haynes, chief executive officer of Aquis, said in an email.

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Cindy Roberts