Reforming the Regulation of Trading Venues in the EU under the Proposed MiFID II – Levelling the Playing Field and Overcoming Market Fragmentation?

The Directive on Markets in Financial Instruments (MiFID 2004), adopted in 2004, brought about substantial changes in the market. Competition between trading venues has increased and a substantial portion of trade in financial instruments has moved from regulated markets to other trading venues. This has created an unlevel playing field between regulated markets on the one hand and other trading venues on the other. At the same time, the fragmentation of trade has led to problems for ensuring investor protection and market surveillance. The Commission has recently proposed a reform of the MiFID regime (MiFID II) to address these two problems. In this article there is an analysis of how and to what extent the proposed MiFID II will solve these problems. It is concluded that MiFID II will solve the problem of the unlevel playing field between regulated markets and multilateral trading facilities (MTFs), but that the proposals may introduce new problems of unequal competition in relation to new kinds of regulated trading venue (organised trading facilities – OTFs), and in relation to unregulated activities which are not considered to involve genuine trade execution. Most of the problems created by fragmentation are addressed in the proposed reform, but it is concluded that the proposed solutions may not be sufficient in all respects.