Virtu Financial Europe (Collectively 'Virtu') Is a Group of Investment Firms Authorised in Both the EU and UK

Virtu ITG Europe Limited t:00. 353. 1 6338000 Whitaker Court, Whitaker Square f:00. 353. 1 6338010 Sir John Rogerson’s Quay www.virtu.com Dublin 2, Ireland

Virtu Europe Response to ESMA Consultation Paper on the Functioning of Organised Trading Facilities ("OTF") (ESMA70-156-2013, the "CP")

Introduction

Virtu Financial Europe (collectively 'Virtu') is a group of investment firms authorised in both the EU and UK. Virtu carries out a range of MiFID activities including market making, proprietary trading, brokerage services, acting as a systematic internaliser and the operation of POSIT MTF. Virtu also offers a range of workflow technology solutions, including order management systems, enabling clients to achieve streamlined access to deep liquidity.

As an operator of a trading venue and as a software provider Virtu is in a unique position regarding the subject matter and proposals contained in the CP. We support the rigorous authorisation and supervision of genuine trading venues in Europe but warn against excessive and overreaching regulation which would stifle technological innovation and competition and reduce workflow solutions essential to an increasingly electronified marketplace.

Virtu considers that the proposals currently put forward in the CP would, unintentionally and dramatically, increase the scope of the regulatory perimeter to encompass certain software solutions which do not perform functions materially similar to trading venues and are more akin to communication systems. On the current drafting such software solutions clearly lie within the scope of the CP. This could put a dramatic burden on National and European regulatory authorities without a proportional safeguarding impact on the markets.

Response to Questions Relevant to Virtu

Q3: Do you concur with ESMA’s clarifications above regarding the application of Article 1(7) and Article 4(19) of MiFID II? If yes, do you agree with the ESMA proposed amendment of Level 1? Which other amendment of the Level 1 text would you consider to be necessary?

Yes, we agree with the proposed amendments to clarify the Level 1 text. The amendments should be set out in MiFIR to ensure uniform application by Member States.

Q4: Do you agree with ESMA’s two-step approach? If not, which alternative should ESMA consider?

Virtu supports any and all measures by ESMA which provide more clarity and certainty to market participants. However, we do not support ESMA interpreting the Level 1 text beyond the intention of the legislature.

Virtu notes the following recitals of the extant legislation:

This material is disseminated in Europe on behalf of certain affiliates of Virtu Financial, Inc., including any of Virtu ITG Ventures Limited (“VIVL”) (Registered in Ireland No. 295549), Virtu ITG Europe Limited (“VIEL”) (Registered in Ireland No. 283940 with a share capital of £50,000,000) and/or its wholly owned subsidiary, Investment Technology Group Europe Limited (“ITGEL”) (Registered in Ireland No. 283939). The registered office of these companies is Whitaker Court, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2, Ireland. Directors K. O’Doherty (Irish), R. Boardman (British), D. Carbery (Irish), D. Furlong (Irish) and B. Fairclough (American). VIEL is authorised and regulated by the Central Bank of Ireland. VIEL operates POSIT®, the multilateral trading facility. VIEL operates a branch in London, England (No. BR017810) which is registered with the UK Financial Conduct Authority and a branch in Paris, France (No. 480281609) which is registered with the Banque de France. ITGEL operates a branch in London, England (No. BR004642). The registered office of the VIEL London branch and the ITGEL London branch is Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY, United Kingdom. The registered office of the VIEL French Branch is 9 Place Vendôme, 75001 Paris, France. Virtu ITG Europe Limited t:00. 353. 1 6338000 Whitaker Court, Whitaker Square f:00. 353. 1 6338010 Sir John Rogerson’s Quay www.virtu.com Dublin 2, Ireland

Recital 112 of MiFID II: “Not all transactions concluded by members or participants of the regulated market, MTF or OTF are to be considered to be concluded within the systems of a regulated market, MTF or OTF. Transactions which members or participants conclude on a bilateral basis and which do not comply with all the obligations established for a regulated market, an MTF or an OTF under this Directive should be considered to be transactions concluded outside a regulated market, an MTF or an OTF for the purposes of the definition of systematic internaliser.” and

Recital 8 of MiFIR: "In order to make Union financial markets more transparent and efficient and to level the playing field between various venues offering multilateral trading services it is necessary to introduce a new trading venue category of organised trading facility (OTF) for bonds, structured finance products, emissions allowances and derivatives and to ensure that it is appropriately regulated and applies non-discriminatory rules regarding access to the facility. That new category...should not include facilities where there is no genuine trade execution or arranging taking place in the system, such as bulletin boards used for advertising buying and selling interests, other entities aggregating or pooling potential buying or selling interests, electronic post-trade confirmation services, or portfolio compression, which reduces non-market risks in existing derivatives portfolios without changing the market risk of the portfolios."

In order that the new proposals do not contradict the intention of the extant legislation and thereby expand the regulatory perimeter so as to encompass software systems that enable an efficiency of bilateral [1-to-1] communications between parties, a distinction should be drawn between (i) such bilateral [1-to-1] communication solutions and (ii) those systems which are truly multi-lateral [many-to-many] and fulfil the definition of "multi-lateral system" in Article 4(1)(19) of MIFID II by enabling "multiple third-party buying and selling trading interests in financial instruments" to "interact in the system".

Virtu strongly encourages that a carve out be acknowledged for, or definitions drawn explicitly and precisely so as to clearly not include, software solutions that facilitate the bilateral [1-to-1] communication between designated parties in respect of potential interests in which there is no genuine trade execution or arranging taking place in the system as opposed to systems which broadcast potential buying and selling interests among multiple third-parties [many-to-many] and facilitate interaction in respect of such interests.

The bilateral systems described do not (a) facilitate communications around such interests between multiple parties simultaneously nor (b) facilitate the interaction of financial interests in the system and, therefore, should not be construed as fulfilling the definition of multi-lateral system contained within Article 4(1)(19) of MiFID II.

We submit that ESMA should be cautious not to opine on the regulatory perimeter to such a degree that any and all software systems designed to support the bilateral communication between

 placing the significant regulatory burden of trading venue operation on software solutions which have purpose of making the communication between parties, and therefore the functioning of the markets, more efficient. The proper operation of a genuine trading venue requires experts in technology, legal, compliance and risk to ensure the system operates safely, efficiently and within the regulatory framework. The associated costs are significant and prohibitive unless the venue can capture a sufficient proportion of secondary market execution, which the bilateral venues are specifically not designed to do. To place such burden on a software provider which is solely providing a system for bilateral communication and to expect such provider to undertake the same obligations as a trading venue without any actual trading or execution taking place on their platform is unduly restrictive and anti-competitive. Software solutions which have developed over the last number of years provide invaluable workflow solutions to brokers and investors. Some are designed to aid in the identification of liquidity which, in turn helps to achieve and document best execution, resulting in a better overall outcome for investors. Applying a regulatory regime not intended for such services would no doubt be unsustainable and possibly threaten their viability. This directly contradicts the goal of encouraging and fostering innovation in financial markets, a key tenet of the Capital Markets Union.

 applying a trading venue authorisation requirement to software communication systems in a manner which does not reflect the reality of what the system performs. This would lead to confusion among market participants as to what services the proposed operator is actually providing. This directly goes against the intention of ESMA stated in the consultation paper which states its aim as "clarifying the MiFID II provisions relating to OTFs and, more generally, multilateral systems to ensure efficient EU market structures and a more level playing field between all firms operating in the EU while reducing the level of complexity for market participants."

 expanding the scope of the regulatory perimeter beyond the intention of the legislature. Beyond a misplaced perception of competitive disadvantage, ESMA should first seek to identify any harms that software providers have on secondary markets and quantify the impacts. In paragraph 32 of the consultation paper ESMA states that "the information received in this respect comes primarily from authorised trading venues who are stressing what they deem to be an unlevel playing field and who are asking ESMA to take remedial actions." While there may be a genuine concern that certain software providers are operating de facto multi-lateral systems without due authorisation, the response to this disquiet should be to clearly identify what falls within the parameters of a multi-lateral system, as opposed to expanding that definition so as to encompass a far broader set of software systems than as we believe was intended and as the definition naturally allows.

Q10: What are the main characteristics of software providers and how to categorise them? Amongst these business models of software providers, which are those that in your view constitute a multilateral system and should be authorised as such?

Virtu does not consider it appropriate to attempt to categorise software providers and designate characteristics to them. Software providers are different from trading venue operators in a number of characteristics and are constantly evolving and innovating to create new solutions. We submit that attempts to categorise them into specified groupings would be inherently flawed. Instead, Virtu considers that ESMA should look to the regulatory definitions of multi-lateral systems and ensure that software solutions which legitimately satisfy those definitions are brought within the extant regulatory perimeter. Trading venues are market-places where multiple interests [many-to- many] can interact with each other directly for the purposes of buying and selling financial instruments.

Virtu therefore identifies types of software systems that should not be encompassed as opposed to types of software solutions that should. The types of software solutions which should be encompassed are those that fulfill the definition of "multi-lateral system" as defined in the legislation.

There exist a number of software providers who identify potential sources of liquidity on trading venues and alert subscribers to those opportunities. However, the subscribers do not interact with one another via the software, nor do the buying and selling interests, and will only do so when subscribers elect to proceed with putting orders through to an actual trading venue. The orders are not pre-arranged, merely the existence of potential liquidity is broadcast to the subscriber, i.e., the system gives the user a view of liquidity in the market. Any ESMA opinion should provide a clear demarcation for this type of software provider. Whilst ESMA's consultation paper makes it clear that "the fact that the ultimate execution of transactions is concluded outside the system cannot be used to demonstrate that the system is not multilateral and should not seek authorisation as a trading venue" (see paragraph 68) it should also be stressed that for the definition of multi-lateral system to be met, the system must facilitate the interaction of buying and selling interests which such operational software as described would not meet.

Q12: Do you agree with the principles suggested by ESMA to identify a bulletin board? If not, please elaborate. Do you agree to amend Level 1 to include a definition of bulletin board?

Whilst Virtu supports the characteristics outlined to identify a bulletin board and suggests that a Level 1 amendment should be undertaken and the relevant definitions should be put in MiFIR to ensure uniform application across the Union., Virtu wishes to stress that a software solution which does not fall within the definition of a bulletin board should not be construed as constituting a multi-lateral system.

As Virtu cautions in response to question 10 above, we believe that attempting to definitively characterise different types of software solutions is an inappropriate way to clarify the regulatory

The proposed definition of a bulletin board, for example, at point (b), automatically rules out any software solution which enables communication. This is appropriate in a bulletin board scenario, as there is an advertisement in respect of buying and selling interests to multiple parties participating in the system simultaneously [many-to-many] and therefore the addition of communication between such multiple parties privy to such actionable interests would be sufficient interaction to fulfill the definition of a multi-lateral system.

However, Virtu is concerned an approach may be adopted whereby a software provider, falling outside the definition of bulletin board, may be assumed to fall within the definition of a multi- lateral system and this should categorically not be the case. For example, a software system that effectively operates as a communication protocol, operating on a bilateral basis [1-to-1], would not fall within the definition of a bulletin board as described as it does not (a) aggregate and broadcast buying and selling interests in financial instruments and (b) it facilitates the communication between parties. However, such a system should not be construed as therefore fulfilling the definition of a multi-lateral system because it does not enable the interaction of multiple third party [many-to-many] buying and selling interests in financial instruments and does not encompass any sort of matching logic such as would be applied by trading venues.

Virtu therefore considers it of the upmost importance that if ESMA were to proceed with the Level 1 amendment to encapsulate its definition of bulletin boards into MiFIR, it should make explicitly clear that the lack of categorisation of a software solution as a bulletin board was not sufficient to conclude that such software provider falls within the definition of multi-lateral system or the regulatory perimeter.

Virtu further suggests that bilateral communication tools [1-to-1] should be explicitly stated to fall outside the regulatory perimeter.