Monday, 6 July 2009


MiFID: Time To Focus On The Right End Of Dog

July 6, 2009
Chris Kentouris, Senior International Editor

Europe's Markets in Financial Instruments Directive was to herald a bright new era of investor protection by ensuring that exchanges would no longer have a monopoly on trade execution.

So went the European Commission's sales pitch when the legislation was first proposed about four years ago.

Now 18 months after the European Union adopted the Markets in Financial Instruments Directive (MiFID), the EC says it will expand it's previously announced "small scale technical review" of MiFID to "more wide-ranging elements." That's bureaucratic-speak for possible new legislation under the guise of what industry pundits are now calling MiFID II.

The EC wants to create a "comprehensive system" of monitoring systemic and individual risk, which could include the formation of a board to monitor risk. Also on the table is the creation of a European System of Financial Supervisors, which would oversee the work of national market regulators.

Granted, there are areas for improvement, but nobody really wants a massive overhaul of legislation - and particularly during a financial crisis. "It's a bit of a sideshow given the rest of what's going on," says P.J. DiGiammarino, head of JWG-IT, a London-based think-tank specializing in MiFID and other European Union legislation.

And perhaps the biggest MiFID shortcoming, say most buy-side firms and even some brokerages, is that increased market fragmentation from new alternative trading venues has decreased execution quality and price discovery - and those two subjects are not being addressed right now.

Part of the problem is that traders - short of buying consolidated trade and price data from Bloomberg, Thomson Reuters or Markit Boat -- need to go to individual Web sites to get free realtime data, which is a time consuming and costly way to collect pricing data. As a result, block trades are sometimes not being reported on time, many trades in the over-the-counter market aren't being published, and some trades are being double-counted.

Market consensus is that creating a consolidated tape - a system that continually reports sales volume and pricing data - akin to the U.S. model might not be a bad idea. But as Miranda Mizen, a principal with research firm Tabb Group, points out that won't do much good if there aren't consistent reporting standards - such as in the case of dark pools. "There needs to be credibility in the data," says Mizen.

Indeed, poor transparency isn't the only reason fund managers aren't really getting the best deals on their trades. Unlike Reg NMS - rules in the U.S. that help ensure fair price execution - MiFID only requires brokers to base their pricing decisions on internal policies and explain those policies to investors. Making matters worse, unlike Reg NMS, MiFID doesn't require exchanges to pass orders along to better venues.

"It won't be possible to create prescriptive rules for best execution because there are too many regulatory regimes involved and exchanges aren't equipped to provide greater connectivity to other venues," says Chris Pickles, head of marketing for investment banking and global accounts at BT Global Services.

For all of MiFID's flaws, it may well have become the whipping boy for the European market's inefficiencies. "Fund managers are still directing their order flow to brokers to pay that broker for services other than execution such as research, access to companies and initial public offerings," says Richard Balarkas, chief executive for Instinet Europe, whose parent, Instinet, operates the successful Chi-X alternative trading system. "Unless fund managers are forced to separate their choice of and payment for brokers' execution services from the choice of and payment for research there will be no effective competition between brokers for the provision of execution services."

Posted by Britannia Radio at 21:18