Virtu Financial, the market maker and liquidity provider, told the European Securities and Markets Authority that escalating costs imposed by trading venues are having immediate and profound negative effects on liquidity and price formation in the European Union.

In Europe, Virtu deploys its own capital as an electronic market maker on most significant trading venues, provides liquidity in equities as a systematic internaliser, and provides agency brokerage services to institutional clients.

The firm told Esma in a response to a consultation that an honest dialog is needed on the rapidly increasing costs imposed by trading venues in the interests of further promoting transparent, fair and equitable markets and a level playing field for all market participants. Virtu said increasing costs are evident across all areas of the trading lifecycle, from market data, connectivity, trade execution, co-location and access, through to clearing and settlement.

“Recently, a sudden, arguably anti-competitive increase by one market operator in its market data fees targeted specifically at the operator’s competitors, MTF operators and systematic internaliser customers, was so prohibitive that those participants were no longer able to support that market, added Virtu. “Whether MiFID II is the catalyst for these cost increases; it is frequently being used to justify those increases.”

Virtu was responding to an Esma consultation on pricing by systematic internalisers under MiFID II, the EU regulations that went live last month.

9 trading venues, 6 associations, 4 sell-siders/banks, one regulator, the CFA and one random provide feedback to ESMA on SI pricing under #MiFIDII https://t.co/6DLAL0Q7ym pic.twitter.com/BF9QaGEbAA

— Virginie O'Shea (@virginieoshea) February 7, 2018

MiFID II prohibits broker crossing networks. Systematic internalisers were originally set up for equities under the MiFID regulations in 2007 for all off-venue trading in the European Union. However only nine banks became SIs and very few trades took place on the back of an SI quote as off-venue trading moved to broker crossing networks. As a result MiFID II has extended SIs to other asset classes in order to capture over-the-counter trading activity and increase transparency.

Rebecca Healey, head of market structure and strategy EMEA  and Gareth Exton, global execution & quantitative service at institutional trading network Liquidnet, said in a presentation to members last week that SI activity reached a peak of €6.4bn ($7.8bn) on 30 January representing a spike in volumes for two days to more than 12% and 11% of activity. However, Healey also warned that there is confusion over the reporting by SIs and it is unclear whether the volumes represent true over-the-counter activity or are just replacing broker crossing networks. As a result, regulators are likely to review SI activity.

Virtu said in its response to the Esma consultation on SIs that it agreed with the regulator that the tick size regime should be applied to trading venues and systematic internalisers in the same way.

The Investment Association, the trade body that represents UK investment managers, and The BVI, which represents the interests of the German fund industry, said in a joint response that they support Esma’s proposal to ensure that public quotes from an SI adequately reflect prevailing market conditions by linking them to the minimum tick sizes applicable to trading venues.

They continued: “Whilst we support SIs being restricted to quoting in the same tick size regime as the relevant regulated market, there should be no restriction on actual execution. Trading at mid-point in circumstances where an SI is permitted to provide price improvement in particular must always be permitted, in line with the best execution obligations of an SI, and as is currently aligned with trading venues.”

Aquis Exchange, which has a subscription-based pricing model, said in its response that failure to harmonize price increments across European venues may result in volumes moving to SIs, where not all participants have access.

“Failure to make this change could have a detrimental impact on the measurement of ‘best execution’ where a bank or broker may feel it is necessary to go to an SI over that of a trading venue simply as a result of the SI having a marginal price improvement which the trading venue is not allowed to make,” added Aquis.

Nasdaq responded that an important element for ensuring a level playing is that both multilateral and bilateral trade execution services use the same price increment when offering execution prices.

“The modification proposed by Esma is all the more important, given that statistics on trading since 3 January, under the new MIFID II framework, show a very significant increase of the share of orders executed by systematic internalisers. In some markets, this share of order execution has increased by more than 10%, making the issue at stake a significant one,” added Nasdaq.