European buy-side traders fear more onerous regulation if their views are not adequately represented during the MiFID review process being conducted by the Committee of European Securities Regulators and the European Commission throughout 2010.
“Buy-side interests are not being properly represented and it is important that they are because we are going to be lumbered with more regulation not less – of that there is no doubt,” warned Richard Farquhar, head of dealing, Liontrust Asset Management, during a debate on the future role of the buy-side trading desk held at the buy-side focus day of TradeTech Europe, a trading and technology conference held in London.
During his TradeTech presentation on changes in US capital markets regulation, Michael Levas, founder and chief investment officer of Olympian Capital Management, urged investment firms to be more proactive both when dealing with regulatory investigations and when responding to proposals for new rules.
“Please get involved with the regulatory authorities,” he told the buy-side audience via video-link from the US. “As practitioners we need to be proactive, get involved and talk to the regulators and politicians.”
Levas said that in response to regulatory proposals for new rules such as the Obama administration’s proposed Volcker Rule, investment managers should use all methods at their disposal to get their message across. “We need to get our voices heard so we are not going from one extreme to the other and there is some notion of common sense when it comes to regulatory changes that are coming to our industries,” he insisted.
One particular area where buy-side views differ from those of regulators is in the area of non-displayed trading. Rule-makers in both the US and Europe are keen to introduce more restrictions on dark pools. Last year, for example, the US Securities and Exchange Commission issued a three part proposal to try and bring more transparency to non-displayed trading venues, including lowering the threshold at which they have to display quotes, publishing actionable indications of interest issued by pools in the national pre-trade data feed and forcing venues to identify themselves in real-time on the post-trade consolidated tape.
Non-displayed liquidity will also feature strongly in this year’s MiFID review: the European Commission will be examining, among other things, whether changes are required to the directive’s large-in-scale thresholds and the pre-trade transparency waivers employed by dark pools.
However, some on the buy-side clearly preferred regulators not to interfere with dark pools. When asked by session moderators Will Rhode of consultants TABB Group and A-Team editor-in-chief Andrew Delaney whether regulators should regulate dark pools more stringently or step back, there was a generally mixed response, but one buy-side trader commented, “I think the regulators should leave things alone and let competition take its natural course. If you don’t want to trade in someone’s dark pool, don’t. As long as you have that choice, know which pools your orders are going to and negotiate that with your brokers, it is not really a problem.”
Some also believe that regulators did not hear the buy-side’s views on a consolidated tape for Europe. Regulators’ initial stance was that market forces would create a consolidated post-trade data source, but to the buy-side’s chagrin, this never happened, making it difficult for traders to get a complete picture of tradable liquidity across countries and trading venues.
“MiFID tried to do something that would have made all our lives a great deal easier had it worked – made everything more visible and more easy to see,” said Farquhar at Liontrust. “It has done precisely the opposite as far as the UK is concerned. Trying to track volume in stocks these days is an unmitigated nightmare – even TCA providers spend half their time telling you that they are not entirely sure they have accurate data.”
Brian Martin, head of trading at Fidelity Investments in the UK, added, “Regulators were very wrong in their assumptions that there would be a market-led solution to a consolidated ticker. In 2010 we still don’t know what is trading in the market and it is difficult to find prints.”