Almost a quarter of European buy-side traders believe transparency has reduced in the equity markets since MiFID was introduced, claims a new study from research firm TABB Group.
In particular, London-based firms’ view of market liquidity has been skewed by the fact that some of their number have reported trades on both the London Stock Exchange (LSE) and BOAT, the new off-exchange reporting venue, according to ‘European Equity Trading 2008:? Liquidity, MiFID and the ?Brokerage Relationship’.
“Twenty-four percent of buy-side traders we spoke to cited the main effect of MiFID to be less transparent since coming into force,” said Kevin McPartland, senior analyst, TABB Group and author of the report.
Moreover, just over half (54%) of those questioned felt MiFID – the Markets in Financial Instruments Directive – had brought no major impact to trading operations, claiming that order routing and best execution policies were in place before its introduction last November.
However, the report asserted that the buy-side is yet to fully realise the benefits of MiFID and that low-touch execution methods and sales traders will be critical as new venues are introduced.
Despite buy-siders’ ambiguous verdict on MiFID’s impact on trading operations, 26% of respondents acknowledged that the introduction of new liquidity sources was forcing incumbent exchanges to improve their technology. Exchanges including the London Stock Exchange and NYSE Euronext have announced plans to upgrade their technology and lower latency in recent months to try to keep ahead of multilateral trading facilities (MTFs) such as Chi-X that have begun to tempt liquidity away.
One of the main advantages of the technology battle between exchanges and MTFs has been an increase in use of electronic methods. The report stated that 57% of those questioned had witnessed a rise in trading efficiency. In addition, TABB estimated that 40% of order flow will be executed via low-touch methods by 2010. However, smaller firms tended to be less impacted by the advent of electronic trading.
In order for the buy-side to deal with liquidity fragmentation, the report considered it absolutely necessary to fully realise what MTFs could offer them, as they siphon liquidity from incumbent exchanges.
This is where the expertise of sales traders is still considered as critical, despite a 9% annual decline in their use since 2005. TABB estimates that only 50% of trades would be executed through sales traders in 2010, compared to 82% in 2005.
“While the job of the sales trader has changed, their role is still and vital for the buy-side,” said McPartland. “Relationships between buy-side and sales traders are an becoming an increasingly important differentiator in the current trading environment.”
The study was based on conversations with 61 buy-side traders in Europe from 18 countries, who mainly employed long-only trading strategies.