Lest we forget

Have we forgotten that MiFID is about connecting savers and entrepreneurs so as to facilitate productive investments? This is one of the issues panelists are being asked to discuss at the 2012 convention of the Federation of European Securities Exchange (FESE), held in Istanbul this Thursday 21 June.

In a session entitled ‘Does MiFID give the right answers?’ a politician, an EU official, two exchange executives and representative of the buy-side will give their views on how the MiFID review is likely to change the European trading and investment landscape.

Of course, what MiFID means to you at present and how you want it to change depends on where you are standing. For Europe’s exchanges, MiFID brought stiff competition from new alternative share trading venues, categorised by the 2007 directive as multilateral trading facilities. Chi-X, the upstart platform launched by agency broker Instinet ahead of MiFID, now claims – in combination with the BATS Europe platform it merged with in Q4 2011 – around a quarter of on-exchange equity trading in Europe. Little wonder that exchanges regard MiFID with mixed feelings.

Such sentiments are reflected in an interview with Judith Hardt, secretary-general of FESE, published in the Q2 2012 issue of The TRADE.

Though quick to rule out a path that would lead back to exchanges as monopolies, Hardt claims the tide has been turned by the global financial crisis, following a period in which achieving price discovery was a secondary regulatory goal to competition. “The G20 has recognised that there is a need to mandate both clearing by central counterparties and trading on electronic platforms to make our markets safer. Regulators across the board have recognised that there is merit in forcing investors to participate in a public market model even if this is not always in their own short-term interest,” she says.

That FESE is generally supportive of MiFID II – except for the planned establishment of a new category of trading venue, the organised trading facility, which FESE regards as a “fudge” – suggests that exchanges feel that the revisions to the directive are in keeping with a new post-crisis legislative and regulatory climate of transparency.

While extension of MiFID’s nostrums to other financial instruments was always intended, its review explicitly became part of the European Commission’s response to the crisis. As such, Hardt welcomes proposals for greater pre- and post-trade transparency for fixed income and derivative markets under MiFID II. “Had such transparency been in place prior to the crisis, we would have avoided to a large extent the amplification and acceleration of the turmoil following the Lehman bankruptcy,” she argues.

Clearly transparency is important to the investor confidence in the financial markets. But transparency isn’t cheap. MiFID would not have introduced exchange competition if the cost of trading had been kept low by exchanges prior to 2007, nor would brokers have dug into their own pockets to develop rival market models. Now it seems, brokers and exchanges are in opposite corners, when it comes to their views on MiFID. Have they forgotten that MiFID is about connecting savers and entrepreneurs so as to facilitate productive investments? No, but they do seem to differ on the best route to that end.

For the full interview with Judith Hardt, See the Q2 2012 issue of The TRADE.

For an account of the debate at the FESE convention on ‘Does MiFID give the right answers?’, which I will be moderating on Thursday, see this blog next week.