Steve Wellard
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steve.wellard@cfainstitute.org
Sarah-Jane Purvis
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sarahjane.purvis@cfainstitute.org
CFA Institute Centre Study Reveals Market Fragmentation Has Had No Material Impact on Price Formation
Investors voice concern over transparency, trade reporting obligations, and dark pools
London, December 7, 2009 − A study released today by the CFA Institute Centre for Financial Market Integrity, the policy arm of CFA Institute, has found no empirical evidence to suggest market fragmentation has had any material impact on the quality of the price formation process for equities traded under the Markets in Financial Instruments Directive (MiFID) regime. The study was undertaken to establish whether the proliferation of new trading platforms under MiFID has affected transparency, costs and price formation to the detriment of investors. The study will be used to support the CFA Institute Centre’s call for a consolidated system (or ‘tape’) for quote and trade data for European Equity Markets.
To complement the empirical analysis contained within the study, independent views of 962 investor users1, drawn from a CFA Institute member survey, were incorporated to build a qualitative and quantitative picture on the impact of market fragmentation. The results highlight that market fragmentation has created mixed views amongst investor users, with their primary concern being the difficulty in obtaining a complete and clear picture of market prices.
The study identifies the following:
- CFA Institute Centre finds no empirical evidence that fragmentation has been detrimental to the quality of the price-formation process
- 70 percent of survey respondents concluded that dark pools are problematic for price discovery
- 68 percent responded that market fragmentation has created difficulties in trade reporting obligations
- The findings highlight the need for an accurate, complete, and clear picture of market prices. Investors should have fair access to such consolidated data
- CFA Institute Centre recommends that European authorities pursue the implementation of a consolidated tape for quote and trade data for European equity markets. A consolidated tape would improve market transparency and best serve investors’ needs
Study author Rhodri Preece, CFA, director, Capital Markets Policy, said, “With the MiFID review scheduled for early next year, we wanted to establish the impact market fragmentation has had on investors. MiFID was designed to increase competition and create a level playing field in financial markets in Europe, and with exchanges losing as much as 20 percent market share to new platforms, we wanted to see if competition was having a positive or negative impact for investors. Our study suggests that there has been no detrimental impact on the price formation process, but fair and complete access to market prices remains a concern. It also highlights the difficulties in post-trade reporting in the fragmented marketplace. If these concerns are not addressed it could ultimately disadvantage large numbers of end-investors within the EU and conflict with the objectives of a fair and efficient market.”
Charles Cronin, CFA, head of the CFA Institute Centre for Europe, Middle East, and Africa (EMEA), added, “The current crisis has highlighted the shortfalls that exist in transparency and regulatory control across capital markets. This report is therefore timely in highlighting to the EU Commission the need to harmonize trading and reporting obligations in the single market. A consolidated system or tape for pricing information would not only improve the quality of data for all stakeholders but also provide a level playing field for participants and help to facilitate best execution.”
View the report. The report author, Rhodri Preece, CFA, is available for comment.
About the CFA Institute Centre for Financial Market Integrity
The CFA Institute Centre develops timely, practical solutions to global capital market issues. Established in 2004, the CFA Institute Centre builds upon the CFA Institute mission to lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence. It carries forward the organisation’s 60-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession. More information may be found at www.cfainstitute.org/centre.
About CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 100,000 members, who include the world’s 89,670 CFA charterholders, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at www.cfainstitute.org