The post-MiFID fragmentation of exchange trading and data has substantially increased the potential for market abuses, according to a new advisory group set up to look at the issue.
Avenues - formed by Bryok, BTA Consulting, Capstan Consulting and Golden Advisors - says MiFID has essentially legalised cross border trading while leaving market surveillance national.
The function of ensuring markets are fair - the surveillance of bids, offers and trades, which was primarily the responsibility of national domestic stock exchanges - is now "almost impossible to undertake comprehensively", says the group, given the fragmentation of trading on competing cross-border exchanges and platforms such as MTFs, dark pools, systematic internalisers and OTC trading.
To prove its point, Avenues monitored trading in Vodafone on a random week in mid-February. The London Stock Exchange carries out surveillance on the activity in Vodafone transacted on its platform, but during that week it saw less than 33% of the total trades, with some 18% being done on MTFs and almost 50% in dark pools, OTC, or on systematic internalisers.
Steve Leegood, of Avenues comments: "In that one stock in one week 800 million shares worth almost £1.2 billion were traded off the LSE. With current systems there is absolutely no way that any exchange can properly handle the surveillance of total market activity to detect abuses when the bulk of trading in that stock takes place elsewhere. And regulators concentrate on monitoring reported trades, not the full detail of the development of the orderbooks that preceded the trades."
Abuses such as front running client orders are suspected to be rife, says Leegood, but under the new regime are now even more difficult to detect.
He says the Avenues advisory group is looking to work with industry participants to address the issue. "There is a potential scandal in the making here, and we want to work with the industry to prevent it becoming an actual one." says Leegood.