Reply form for the Consultation Paper on the
Guidelines on the calibration, publication and
reporting of trading halts
06 October 2016 | ESMA/2016/1440
Date: 06 October 2016
Responding to this paper
The European Securities and Markets Authority (ESMA) invites responses to the specific questions listed
in the ESMA Discussion Paper on the Guidelines on specific notions under MiFID II related to the management body of market operators and data reporting services providers, published on the ESMA website.
Instructions
Please note that, in order to facilitate the analysis of the large number of responses expected, you are
requested to use this file to send your response to ESMA so as to allow us to process it properly. Therefore, ESMA will only be able to consider responses which follow the instructions described below:

use this form and send your responses in Word format (pdf documents will not be considered except for annexes);

do not remove the tags of type <ESMA_ QUESTION_MIFID_GTH_1> - i.e. the response to one
question has to be framed by the 2 tags corresponding to the question; and

if you do not have a response to a question, do not delete it and leave the text “TYPE YOUR
TEXT HERE” between the tags.
Responses are most helpful:

if they respond to the question stated;
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contain a clear rationale, including on any related costs and benefits; and

describe any alternatives that ESMA should consider.
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Deadline
Responses must reach us by 06 December 2016.
All contributions should be submitted online at www.esma.europa.eu under the heading ‘Your input/Consultations’.
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Introduction
Please make your introductory comments below, if any:
< ESMA_COMMENT_MIFID_GTH_0>
Introduction
MarketAxess Europe provides an electronic trading platform that enables institutional investors and broker-dealers to efficiently trade corporate bonds and other types of fixed-income securities through a ‘Request for Quote’ (RFQ) based trading platform.
We welcome the opportunity to comment on the CP “Guidelines on the calibration, publication and reporting of trading halts”. Our principle concern is the application of the rules to RFQ markets. As the Guidelines apply to ‘algorithmic trading or high frequency algorithmic trading’, the Guidelines will apply to RFQ
systems that permit Dealers to automatically respond to a manual request for quote. We believe that this
approach creates a number of practical difficulties described further below and that a more nuanced
approach is needed to enable RFQ markets to function effectively.
Difficulties with the proposed approach
As noted in Recital 5 to RTS 7, it is widely acknowledged that RFQ systems are, almost by definition, used
for less liquid instruments, and as a result do not give rise to high levels of trading volatility or unexpected
price movements seen on order books which have resting limit and stop limit orders. RFQ based trading
systems are simply not intended to deal with such fast moving liquid markets and we are not aware that
they have ever experienced an event that would require an automatic halt to trading. Moreover, RFQ
based systems do not have resting orders and have built-in protection provided by the one-to-many aspects of a RFQ. That is, each RFQ is separately initiated and all responsive quotes are evaluated independent of other buying or selling interest. Furthermore, the RFQ process typically takes place over
several minutes and in the vast majority of cases involves a human decision maker. We also note that
section 19 of the consultation paper contemplates that constraining trading on an order book could encompass mechanisms where trading switches to “auction mode”. The RFQ process is in effect an auction
mode and consequently is in our view by definition “constrained”.
Unlike order books operating in liquid markets, an RFQ system dealing with less liquid or illiquid instruments will frequently have limited access to meaningful historical reference pricing. Corporate bonds in
particular, for which RFQ is generally the protocol of choice, are characterised by trading patterns which
are often idiosyncratic and usually characterised by large periods of inactivity, occasionally interspersed
by short news driven periods of liquidity. For this reasons, market participants have generally found it
difficult to generate algorithms that can be used without human intervention or supervision (other than for
the most liquid bonds). Given this, we think it highly unlikely that we could correctly calibrate trading halts
to identify situations where price movements reflect a dysfunctional market. There are generally few or no
data points available and significant discrepancies in pricing may legitimately exist, for example on the
basis of the size of the trade or counterparty risk. From a practical perspective, the only way to circumvent occurrences of negative market impact for illiquid instruments using mathematical parameters would
be to use such wide thresholds as to render the control ineffective.
Proposed Approach
We believe that the need for a measured approach in relation to RFQ based systems is acknowledged
within Recital 5 of RTS 7, which provides that “some organisational requirements may not be appropriate
for certain trading models although their trading systems could be supported to a certain extent by electronic means. In particular, the specific requirements to be set in relation to request-for-quote systems or
hybrid systems should be considered according to the nature, scale and complexity of the algorithmic
trading undertaken”.
Given the extremely limited nature of the “algorithmic trading” conducted in these systems and the profile
of the instruments, we believe that appropriate controls can be achieved through more effective means
than purely mathematical based parameters. We do not believe that such parameters are likely to lead to
a correct decision to suspend trading activity in our markets. Rather, we believe we will need to take into
account a number of other factors, depending on the parameters of the trade (including size), the range of
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information available and ultimately a degree of human judgement in order for the controls not to result in
market disruption.
In order to protect our market, we would like to take the following steps, which we believe would achieve
the policy objectives of the legislation:
1. We would create warnings to responders when the quotes fell outside of an expected range provided that sufficient pricing information exists to provide a reliable indication of an expected range.
2. To introduce a series of alerts that would result from trading in any ISIN that materially changed in
terms of frequency or price (assuming the instrument is liquid and pricing is available). We would
propose that all alerts be investigated on their own merit and in the context of activity across any
other relevant market that will make its information available for such investigative purposes.
< ESMA_COMMENT_MIFID_GTH_0>
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Would you consider these factors discussed above to be useful? Could you identify any additional element to be factored in?
<ESMA_QUESTION_MIFID_GTH_1>
As explained above, we consider that under Section v where guidance is given for continuous auction and
quote driven systems, it should also provide guidance for the approach to be taken for RFQ protocols. Our
view is that it would be consistent with the recitals to state that given that the nature of an RFQ process is
in effect an auction model, that it is by definition a constraint of volatility.
We also consider that in section ii while guidance is given for instruments that are considered to be liquid,
guidance should also be given for instruments that are not liquid, not only by definition using the liquidity
calibrations in RTS 2, but also in practice not liquid enough to provide reliable parameters for an analogous trade. Even a more liquid instrument may trade at different
<ESMA_QUESTION_MIFID_GTH_1>
Do you consider that the Guidelines regarding calibration of volatility parameters
should also apply to mechanisms to reject erroneous orders (i.e. order price / volume collars) and that ESMA should propose Guidelines on this issue at its own initiative?
<ESMA_QUESTION_MIFID_GTH_2>
Not for RFQ systems, for the reasons explained above.
<ESMA_QUESTION_MIFID_GTH_2>
Is there any other aspect which should be considered in these Guidelines so as to
prevent market-wide volatility events given the current structure of European markets?
<ESMA_QUESTION_MIFID_GTH_3>
Other than explained in our introductory comments, no.
<ESMA_QUESTION_MIFID_GTH_3>
Do you consider that the proposed order and trade feed reporting standard for
trading status will contribute to facilitate a correct identification of trading halts
across Europe? Do you foresee any drawback on it?
<ESMA_QUESTION_MIFID_GTH_4>
Yes.
<ESMA_QUESTION_MIFID_GTH_4>
Would you prefer a further degree of granularity in the information provided as described in the text under paragraphs 46 and 47? Please elaborate in case you consider necessary further granularity but you disagree with the proposed approach.
<ESMA_QUESTION_MIFID_GTH_5>
As explained above, RFQ markets cannot apply the same requirements as order books and discretion
should be left to the trading venue in order to determine the most appropriate route to manage volatility
according to its protocol, in order to avoid perverse consequences which exacerbate the mischief the
regulation is trying to prevent.
<ESMA_QUESTION_MIFID_GTH_5>
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Is the code proposed above (i.e. “VH”) appropriate, or should another code be
used? Please elaborate in case you consider that another code should be used.
<ESMA_QUESTION_MIFID_GTH_6>
TYPE YOUR TEXT HERE
<ESMA_QUESTION_MIFID_GTH_6>
Do you agree with the reporting template proposed?
<ESMA_QUESTION_MIFID_GTH_7>
TYPE YOUR TEXT HERE
<ESMA_QUESTION_MIFID_GTH_7>
Are there any other items that should be included in the template?
<ESMA_QUESTION_MIFID_GTH_8>
TYPE YOUR TEXT HERE
<ESMA_QUESTION_MIFID_GTH_8>
Please provide any views with respect to the costs and benefits identified in the
relevant annex.
<ESMA_QUESTION_MIFID_GTH_9>
TYPE YOUR TEXT HERE
<ESMA_QUESTION_MIFID_GTH_9>
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