Senior buy-side traders have expressed their disappointment that the European Commission (EC) still intends to reduce permissible trade reporting delays in MiFID II, despite evidence of its potential negative impact on investment in small- and mid-cap firms.
During a panel discussion on the last day of the TradeTech Europe conference in London last week, two speakers were among a number of buy-side heads of trading that recently presented the EC with data supporting their concerns that plans to force brokers to report risk trades at the end of the trading day would increase trading costs to levels that would deter investment in smaller firms.
Dale Brooksbank, head of European trading, State Street Global Advisors, and Kristian West, head of European trading at J.P. Morgan Asset Management, had been hopeful that data-supported analyses delivered by them and their peers in Brussels on 9 March would have an impact on the EC's decision making.
But those hopes appear to have been dashed when Laurent Degabriel, policy officer for securities markets at the EC, suggested during an earlier TradeTech panel discussion that the Commission's commitment to transparency, in line with Group of 20 leaders' priorities for financial market reform, would override all other considerations.
CESR's legacy
Proposals to reduce delays permitted by MiFID's existing reporting regime were first made by the Committee of European Securities Regulators (CESR) in technical advice issued in July last year, ahead of the European Commission's review of the directive. CESR's proposal to shorten permitted delays from three days to no later than the end of the trading day was duly included in the EC's MiFID consultation document issued in December 2010.
“It was an interesting meeting which we thought went well – until yesterday,” said Brooksbank, during the panel, referring to the buy-side trading heads' face-to-face discussions with Brussels officials last month. “Kristian and I are not alone in providing data to illustrate the unintended impact of potential regulatory change. It's not an immaterial impact we're talking about here.”
“Over the last six months we've tried to engage, articulate and have an active dialogue. We would like to educate and demonstrate why certain assumptions are flawed and why particular changes are detrimental to how we invest,” said West, adding that impact of the new trade reporting regime would be “painful and upsetting” to investors and issuers alike.
Risk trades that rely on capital commitment from brokers are used on a regular basis in the European markets, and especially by UK-based buy-side trading desks, to avoid market impact when trading large blocks of stock or illiquid names, such as mid- and small-cap stocks. The current rules on trade reporting allow a delay of up to three days on some trades, which permit brokers time to unwind their positions before publishing details of the trade.
Industry estimates suggest that such trades account for only 1-2% of overall equity trading volumes in Europe, however the EC is keen to increase market transparency to support price formation and retail-level confidence in Europe's equity markets.
Both buy- and sell-side market participants have expressed concern that same-day reporting would limit brokers' room for manoeuvre, increase their market risk and therefore increase trading costs. A number of market participants have also pointed out that institutional investors' appetite for growing enterprises could be reduced if the quant models they use to identify potential investments have to be adjusted to factor in higher trading costs. As such, they have complained that EC policy on this matter appears to run counter to the wish of many European politicians for the financial markets to better perform the capital formation process in support of the wider economy.
A spokesperson from the EC declined to comment on the plans to shorten trade reporting delays. The EC is expected to make its final proposals for the second version of MiFID in July.