Brokers are hiring experts in electronic equity trading for their fixed income businesses, as firms prepare for the post-MiFID II landscape, a London conference was told.
Speaking at the Investment Company Institute (ICI) Global market structure conference in London yesterday, Richard Semark, managing director of equities and CEO of UBS MTF, confirmed that his and other investment banks are revising the way they do business in fixed income markets.
“The changes to the fixed income market coming from MiFID II are huge. At UBS, we’re looking at moving our fixed income business towards more of an agency model and are hiring equity and electronic trading experts into that side of the business, as are our peers,” he said.
While there has been considerable focus on new rules affecting equity markets in MiFID II, such as caps on dark pool trading, greater oversight of algorithms and tighter rules on best execution, fixed income markets are facing fundamental changes.
Scott Cowling, head of EMEA equity trade at Blackrock, highlighted the scale of transformation, saying “all of the regulations heading to the equity markets fade into irrelevance compared to what is going on in fixed income.”
MiFID II will require greater transparency in fixed income trading and a larger role for electronic trading platforms. Basel III is also reducing the ability of banks to hold fixed income products in their inventory. This has prompted a shift to an agency model highlighted by Semark, and a move away from principal trading that had traditionally dominated fixed income.
However, Mark Hemsley, CEO of BATS Chi-X Europe, said attempts to apply equity market rules to other asset classes could be problematic.
“The attempts to increase transparency in liquid fixed income products are making it more difficult to trade in fixed income,” he said. “But realistically, only about 1-2% of fixed income is liquid enough to be traded on a transparent, regulated market, and that’s quite uncomfortable politically.”
Panelists also discussed new rules on best execution, though views were mixed on how they will be applied in practice.
“I’m concerned that best execution regulations could go too far and not leave room for the industry to add value, make decisions and differentiate their offering,” explained Semark.
However, he did welcome the overall aim to improve communication on execution between the buy- and sell-side, something the institutional investors on the panel agreed with.
“I think this will help to drive greater transparency and help us to become better at understanding our execution and take a more analytical approach to it,” added Dale Brooksbank, head of European trading at State Street Global Investors.
But what is largely hampering best execution is both a lack of consolidate tape, and high costs for market data which continue to plague European trading. While MiFID II allows regulators to step in if the industry fails to reach a solution, panelists were disappointed that a consolidated tape could potentially still be years away.
“An accurate consolidated tape is absolutely crucial to improve transparency”, said Cowling, “Right now, if you ask five people how many shares in Microsoft were traded yesterday, you will get the same answer. But if you ask the same five how many Vodafone shares were traded yesterday, you could get five different answers and it’s a terrible indictment that we don’t know how many shares were traded in one of Europe’s biggest names.”
Brooksbank agreed, adding, “We’re paying a lot more for market data than in the US and we’re getting less accurate information and that’s got to change.”