EU watchdog sides with exchanges over new trading rules

By Huw Jones

LONDON, Nov 9 (Reuters) - The European Union's markets watchdog has proposed a tightening in share trading rules within the bloc's MiFID II reform, marking a victory for exchanges at the expense of big banks only weeks before the new rules come into force.

The European Securities and Markets Authority (ESMA) has proposed that shares traded privately inside banks should be in the same price increments, or "tick size", as on public exchanges such as Deutsche Boerse (IOB: 0H3T.IL - news) , Euronext (Euronext: ENX.LS - news) or Nasdaq (Frankfurt: 813516 - news) .

"ESMA considers it important to ensure a level playing field between different means of trading as envisaged by MiFID II," the watchdog said on Thursday.

MiFID II is a revised version of rules designed to ensure harmonisation of financial services across the EU.

Without the late change, shares traded on exchanges could shift to banks, the watchdog said.

"Such an outcome appears likely in today’s technology driven environment, where the order flow is automatically redirected to the best-priced quote, even if the quote only offers a very marginal price improvement," ESMA said.

"It is doubtful, however, that such an outcome would provide end-clients with real benefits."

MiFID II comes into force on Jan. 3, already a year behind schedule. ESMA has invited comments on the change by Jan. 25.

Exchanges have been lobbying to stop "systemic internalisers" (SIs) inside banks from having an advantage.

Nasdaq has said that an ability to improve on share prices without respecting tick sizes would mean SIs would be "extremely likely to capture significant trading flows".

This could lead to a fundamental change of market structure away from public markets to private, opaque and bilateral liquidity pools, Nasdaq has said.

ESMA has already taken steps to stop SIs from different banks linking with each other to create a virtual rival to the exchanges.

Markus Ferber, a German centre-right lawmaker who steered MiFID II through European Parliament, said all loopholes in the rules must be closed.

"If we truly want a level playing field and orderly pricing, than all market participants must be playing by the same rules," Ferber said in a statement.

(Reporting by Huw Jones; Editing by David Goodman)