Transparency has been something of a ‘buzz word’ in regulatory circles since the financial crisis, but it never ceases to amaze me quite how many parts of the financial services industry remain opaque.
In numerous conversations over the past few weeks, transparency has come up time and time again.
The scandal over Barclays LX is perhaps the most prominent example of where a lack of transparency has hurt not only investors, but the reputation of the industry. With the public already concerned over the role of high-frequency trading (HFT) in fixing markets against the interests of investors, the news that a major global investment bank is accused of covering up the extent of HFT on its trading venue is unlikely to win the industry any sympathy.
Unfortunately, it seems this reluctance to be transparent is endemic among the sell-side despite the many regulatory initiatives to the contrary since the financial crisis. Brokers have been content to be highly selective with the information they give to their buy-side clients and while this is beginning to change, it is largely due to institutional investors having to be more thorough in their efforts to extract information, rather than a change in sell-side culture.
Some regulators in the US are now calling for increased dark pool transparency to ensure investors really do understand what they’re being exposed to, but should it really have to be this way? The buy-side has been on a long journey in recent years to better understand how their orders are being handled and what kind of flow they’ve been exposed to along the way.
There has been ample opportunity for the sell-side to help with this, but an inability to act means the industry as a whole is likely to face much stricter rules and oversight than might have been the case if it had self-regulated and got rid of unnecessarily opaque structures beforehand.
Of course, the buy-side must be mindful of its own obligations to improve transparency. Moves to unbundle the cost of research and execution commissions by regulators in the UK and Europe will ultimately make the investment process more transparent for end investors.
Though there is certainly a convenience factor in the old bundled payments model, it failed to give investors a real sense of what the true costs of asset management were and in many cases left them worse off through overpaying for research.
The transparency buzz is rapidly becoming a hard reality for the industry. While some have tried to resist, regulators are determined to change things. Perhaps even more important for the buy-side is that end investors are scrutinising transparency issues more than ever and is where asset managers’ loyalties ultimately lie.