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Is MiFID yesterday's news?

For the last two years there has been no end of so called experts announcing how MiFID would totally change the securities market in Europe. Noticeably their message of gloom was modified as MiFID neared towards implementation and no clouds had been spotted to fulfil the MiFID soothsayers, scaremongering and trying to panic the market. After MiFID implementation last November the expert gloom and doom merchants switched their message as the market calmly met its MiFID targets. The scaremongers then switched their tactics often using the term "this is a marathon not a sprint". This obviously to enable ongoing future sales of their MiFID related products. Well, we are now six months into MiFID and what's changed?

Sure we have a number of new trading venues in the offing (Some already working, some due to go live this year) but we have also seen several announce closure. I suspect this will be the future trend as the trading venues suffer with lack of volume and liquidity. The markets do not give away their business over night and a lack of liquidity will drive new trading venues out almost before they are in!

Hence we can expect most new trading venues to struggle against increasing competition from new and old alike. Traditional Stock Exchanges still hold pivotal market positions and it's going to be extremely difficult to move them. Thus most new venues will come and go fairly quickly.

So don't hold your breath and expect these new trading venues to drastically change the current order flow or provide strong competition with the existing Stock Exchanges. You only have to look at the US market, where the New York Stock Exchange and others eventually absorbed the threat of ECNs.

If reading or listening to the MiFID doom and gloom merchants one should have first noted where they worked and what they were selling? The motivation for revenue often determines the message being sent. Hence consultants will normally be first in the line trying to stimulate interest and fat contracts, immediately followed by the software suppliers hard pressed to sell more product or enhanced licences. Now who amongst us does not appreciate the truth in this statement?

It's more revealing when gauging the real situation in the market by focussing on how the traditional structure organisations are responding to MiFID and how they are meeting the requirements of the member financial firms. The trade associations have by and large performed wonderfully well with MiFID, with MiFID Connect taking all the plaudits in this space. Other organisations have demonstrated vested interests and actually damaged the market. The purveyors of doom that have dominated the media have not been prepared to present MiFID as a done deal due to their own interests. We all know who the main protagonists of MiFID woes are and I am afraid they are now becoming just a little comical with their constant presentation of MiFID as some kind of regulatory Armageddon! The games up chaps so let's please move on!

We can now see that most financial services firms have achieved the MiFID objectives and in reality they have always been comfortable with MiFID. The evidence appears to show that most firms very quickly understood their position and reacted accordingly to ensure MiFID compliance. There is no evidence yet of any major failure of any financial services firm under new regulations, as a result of MiFID. The software suppliers to financial services companies have performed admirably and supported their customers making sure of MiFID compliance. There appears to be no evidence that any existing technology has ultimately been found wanting in the customers MiFID projects.

I have often been on the tail of the regulator but in the case of MiFID I can give them a well earned pat on the back.

The UK regulators are very comfortable in their firms being able to comply with the new rules. Any sanctions for not complying with MiFID are unlikely to be levied until the market has settled down post MiFID and the current financial crises has subsided. No one will be over burdened with regulatory policing while they have to come to terms with the present difficult market conditions. This is sensible policy being used by the FSA and a more consultative approach than that of the past.

The traditional Stock Exchanges in Europe are all thriving and with new system developments beginning to be rolled out, all have responded positively to new regulations and changes in the market. The status quo looks like it will be maintained in the market for the immediate future.

So the next time anyone contacts you from an organisation that has MiFID in its name run a mile. They are after your budget and will provide little or no value! Next time a supplier tries to sell you solution that can be enhanced for MiFID beware. Most of the top quality suppliers have already incorporated MiFID solutions and are moving on to more exciting functionality. MiFID is now old hat! It was never a difficult project to achieve and virtually every firm is able to meet the regulatory requirements. Some financial services firms have plans to develop their business others plan to stay as they are, either strategy can be good depending on the firm.

Well, November 2007 has come and gone and it's about time we all put the debate about MiFID behind us and concentrated on the future. Companies should really focus on some of my major concerns about the future including the indications of a greater risk factor as evidenced by Soc Gen, the credit crunch and the down turn in the global economy. But all these are well known and established risks which are included in counterparty, customer, market and operational risks and have always been the main areas that financial services need to focus on and find an effective solution for. Continued focus on the important objective of risk mitigation will bring about tangible business benefits for companies and their clients. With success in this area, the global concerns brought by financial crises will also be tackled, limiting potential systemic impacts in the markets. This will enable greater management and control by Governments and central banks. In this context I have to say move on, MiFID is yesterday's news!

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Comments: (14)

A Finextra member
A Finextra member 31 March, 2008, 17:26Be the first to give this comment the thumbs up 0 likes

Nope Chris

I was not undervaluing MiFID and the other directives but rather stating the obvious that we all need to move on and concentrate on the many important issues hitting FS. MiFID has already been implemented and from here on the path has been laid.

I do not believe that the media facination with MiFID should be perpetuated, rather that we should all be putting MiFID into the context of the many directives you listed, which are forming a politically inspired single market of equals with standardised protection and increased customer services.

The new venues that are being set up are having a mixed birth I noted and also wanted to draw people's attention to the very powerful position of the Stock Exchanges. All I believe have responded superbly with changes to meet their customers requirements and with exceptional technology utilised.

I do not believe that most FS firms are floundering! There is no evidence of this, bar the media attempting to show a industry in crisis. However, I believe the real crisis is not with MiFID or anything close but a genuine global financial turmoil, unseen for many decades, if ever! In this situation attention should be given to solving the risk issues that have been well documented and detected in many of the headline storys in the financial pages.

Taken within the context of what FS firms are facing all the Directives should form a single strategy and not be seen in isolation and treated like buses. This view will be hampered if MiFID keeps being trumpeted.

MiFID I believe has already been included by many firms within their strategic business and systems development. I do not see any evidence that any firm is teetering on non compliance. This may change of course but until then its irresponsible to present the FS industry as being unable to cope with MiFID

I firmly believe that the Banking industry are able to work out and already know what their plans are and how they will comply . New trading venues will be added if that is part of their business development. Each firm has their own agenda and some will gain and some will not, as is normal in business.

It is not a time to be shortsighted and focus on MiFID, where far bigger challenges lie ahead. This was the point I was drawing attention too and why for most professionals in FS, MiFID is old news!    

A Finextra member
A Finextra member 31 March, 2008, 17:45Be the first to give this comment the thumbs up 0 likes

Fully endorse (as usual)  Chris' comments

Ponder on what the market would be like without MiFID -change has happened already

- New venues (240+ to be precise) driving finer spreads and greater liquidity

- New service offerings to reflect customer rights

- Client challenges have happened on back of MiFID law - not all in public domain

- Regulators now have information with which to regulate - watch this space (carefully!)

- Change takes time, MiFID has now happened, the market forces are now working out what post MiFID "good" looks like.

- Smart thinking does look at this as the next 10 years of European securities and tries to keep totally abreast of the prevailing viewpoint and market plays

www.regonline.com/JWG-IT-FORUM-LONDON

Yours Nigel Woodward and JWG-IT leaders of the vested interests!

 

A Finextra member
A Finextra member 31 March, 2008, 18:36Be the first to give this comment the thumbs up 0 likes

Hi Chris

Yes, I agree we are saying similar things but in different ways. I don't think I used the terms Dinosaur or Dodo but I did make the point that it had already been absorbed within the FS community and it is therefore pointless debating endlessly causes where effects are the important thing.

The landscape has now been created by MiFID and the issue is to build on top not keep harping on about things that have now passed by.

We do not know what the eventual picture will look like! Who will win? Market, Financial Centre, Financial Services Supplier, Stock Exchanges and so on. As with the numbers of new venues. Logic says not all can win and gain the most. History says the survival of the fittest will be a strong factor.

How much business is required to maintain liquidity at any trading venue? Are there enough orders to go round? Will the current economic problems blighting the markets, cause a shift in investments away from securities?

All these are issues that we should be concerned with and not MiFID. MiFID was implemented in November so lets consign it to history and work on the aftermath. I for one am pretty excited about the future despite the current turbulant waters, we have to steer through. Great to chat about this though and thanks for your comments, giving me a chance to reply 

A Finextra member
A Finextra member 01 April, 2008, 09:39Be the first to give this comment the thumbs up 0 likes

Hi Gary, Chris, Jitz

What an interesting subject!  I have to agree in some respects with Gary the word MiFID may be dead, however the structural market changes that it has started are only just beginning.

 We already have Chi-X and have Berlin Boerse Equiduct Trading and Turquioise due to open for business as providing 'light' pools of liquidity in more than one Member States equities.  We have Euro Millennium, Turquoise and others going into the 'dark liquidity' space, and if we look forward we see Nasdaq OMX Europe and I believe we will also see NYSE Euronext moving into the London market.  For a piece of non changing legislation it seems to have already changed quite a lot.

 I am only discussing the equity markets here but Project Rainbow is already on the cards in the ETD space.

What has yet to change however, is financial institutions understanding that the local exchange is not a safe harbour any more.  The French understand that, probably because of the retraction of the concentration rule but the London market on the whole is still very comfortable with using only the LSE.  I believe that this will change soon due to the new large venues operating in the London market and the fact that no one has mentioned is that the interpretation of Best Execution and Transparency has been taken away from the local regulator, including the FSA, and centralised in Brussels, (new EU regulation passed on the 12th February).  This will necessitate a retink of execution policies across Europe with possibly interesting results.

So long live the dodo!!!

Bob Fuller

A Finextra member
A Finextra member 01 April, 2008, 10:09Be the first to give this comment the thumbs up 0 likes

Hi Bob

I thought this would draw you into a comment! Of course your spot on and we must all keep our eye on whats  actually going on rather than debate MiFID. Whats happening as a result is extremely interesting and i think very hard to call the winners and losers.

I do know there will be winners and losers

The Best Execution retrench back to Brussels gives a very clear indication that what happens next will determin where the market goes and who will be best placed?

The FSA in the UK but regulators more widely in Europe will have to be a little more on the ball to ensure they are performing their responsibilitys and FS firms will have to be more careful about the future direction as they are unlikely to get much lead from their regulator.

This MiFID aftermath demands FS firms think on their feet and act fast. The flexibility inbuilt within MiFID is now being shown and i beleive the game is now well underway. MiFID has now been done to death and beggining to become a industry bore. Many people eyes glaze over once MiFID is included and this is detracting from the real issues that people should have in their sights. A bit like STP after the marketing people had over played the term! So i would like to see MiFID consighned to a historicle fact and concentrate on the exciting new order now being created.

A Finextra member
A Finextra member 01 April, 2008, 12:19Be the first to give this comment the thumbs up 0 likes

Gary

You certainly got me going there!! It is not just in the execution world that things are changing, just look at clearing and settlement, for example the LSE announcement re the LCH.  So what with new very competitive venues and changes to the European Clearing & Settlement landscape I believe that Execution Policies will have to be much more cost aware which is not the case at present.

In fact in today's capital strapped world the only forward looks to me to be to outsource not just 'back office' functionality but execution services.  This won't just be true for the smaller players but also the Tier 1's as they struggle to fund the technolgy required to connect and execute effectively on these new venues and Clearing and Settlement services.

Bob Fuller

A Finextra member
A Finextra member 01 April, 2008, 12:55Be the first to give this comment the thumbs up 0 likes

Hey Bob

On the button again!

The Clearing and settlement aspects of Best Execution will be huge and I hope FS firms are benchmarking their prices and capabilities already. They are going to have to look very closely at the bottom line and I believe that will cause a reappraisal of costs. As you say the outsourcing solution becomes a very attractive option.

The outsourcing of executions is clearly going to become more and more attractive as the risks of missing Best Execution becomes greater and eventually regulations catch up.

I believe that there are already very good technical solutions on the way that will certainly capture tier two and three FS firms to solve their best execution agreements. It will be very interesting if tier one eventually see the execution capability as a standard and move their services more towards bespoke and value added. With the number of new venues hitting the market (Although more will fail than succeed in my view) the attraction to outsource might become overwhelming.

Brennan Carley
Brennan Carley - Proton Advisors - New York 01 April, 2008, 16:19Be the first to give this comment the thumbs up 0 likes

"You only have to look at the US market, where the New York Stock Exchange and others eventually absorbed the threat of ECNs."

 

If you are looking for precedent, the US is a bad place to make the argument that MiFID is done and dusted!  Having lived through RegATS and RegNMS (which are not the same as MiFID I realize), I would only point out that:

 - The NYSE absorbed the threat of ECNs in part because pre-NMS they still had many regulatory protections, and by acquiring (or being acquired by) an ECN (ARCA).

- Even still the NYSE continues to hemorage trading volume to competitors.

 

And of course the "others" (NASDAQ) only survived by buying the ECNs (INET, BRUT...) after losing great chunks of market share.

 

Will this play out in Europe?  Too soon to say, the market structure (especially the role of CSDs) is different and more vertically tied than it is in the US, etc.  

But if I were a European exchange then the US experience would give me cold comfort!

 

A Finextra member
A Finextra member 01 April, 2008, 18:09Be the first to give this comment the thumbs up 0 likes

You make some very good points

I was using the US, as this is the nearest we have to measure the changes happening in Europe. It is unprecedented and we are poking around in the dark a little.

The CSDs are less vertically linked than you suggest and if anything the horizontal structure in Europe of Clearing and settlement provides the Stock Exchanges with plenty of threat. However, at the end of the day the securities business takes an age to move, as most FS firms are tied by legacy thinking, more than by saving a few pence off the price of execution.

MiFID has gone and we have to concentrate on building on the foundations that have been put in place. We can anticipate more directives in the future to fine tune, but in the meantime can we all just let MiFID go! 

A Finextra member
A Finextra member 01 April, 2008, 18:58Be the first to give this comment the thumbs up 0 likes

Gary

 Let MiFID go, sounds like a pop tune to me.  I have to disagree slightly with that comment, MiFID is still with us and the revised definitions from Brussels will undoubtably create the need for further changes in how Financial Institutions behave.  So I don't think we can safely say it's dead yet.  Indeed the definitions may well be used to increase transparency above what we see at the moment. Especially given the current state of being unable to value what should be pretty vanilla instruments.

 Bob Fuller

A Finextra member
A Finextra member 01 April, 2008, 19:22Be the first to give this comment the thumbs up 0 likes

Hi Bob

I think that further directives will probably not be MiFID. MiFID was implemented in November and I dont see the point of keep having to refer back. Surely ammendments will come through local regulation that has already been prepared by MiFID. Any future changes will likely require new directives rather than to ammend those already implemented. Otherwise we will be stuck for years debating and over engineering something which has long been implemented.

The flexibility built into MiFID has caused all the various EU markets to engage in ongoing fine tuneing that becomes more difficult as we go along.

So my view is lets draw a line, see where we are in the light of implementation and move on. If that requires new directives than so be it!

I think this BLOG has raised many real issues which shows the market difficulties quite well. 

A Finextra member
A Finextra member 03 April, 2008, 14:13Be the first to give this comment the thumbs up 0 likes

Not sure where your coming from Dan but totally agree about the problems of finding the real price. Transparancy has been clouded by MiFID to some extent that is a strange result from a directive offering so much oportunty.

I do think that time will settle the market and plenty of new venues will go as fast as they came

A Finextra member
A Finextra member 03 April, 2008, 15:30Be the first to give this comment the thumbs up 0 likes

Hi Gary,

I hope I am not too late.

You write, "So don't hold your breath and expect these new trading venues to drastically change the current order flow or provide strong competition with the existing Stock Exchanges. You only have to look at the US market, where the New York Stock Exchange and others eventually absorbed the threat of ECNs."

One must, respectfully, disagree. The ECNs were, in fact, enormously successful at attracting liquidity away from the major exchanges in the US. So much so, that even today, the NYSE's trading on its own listed stock has dipped under 50%. The ECNs were so successful, and the threat they posed so real, that the exchanges were forced to buy them out and pay very high multiples to recover the liquidity lost-they would not have done so unless they had to. Amusingly enough, other new entrants, such as BATS, came again and drove liquidity away from the main exchanges once more!

To further emphasize the success of the ECNs, there was a reverse takeover from a technology point of view; both the NYSE and NASDAQ today use the trading and technology platforms from the ECNs they took over. The electronic side of NYSE is Archipelago's, and NASDAQ has changed twice using BRUT and INCA.

In short, the main US Exchanges took over the ECNs precisely because they were hugely successful and posed a real threat to them. Should one expect the same in Europe? Yes, indeed; MiFID and its abolition of the concentration rule will serve to catalyze change. There is absolutely no reason to think otherwise.

Will it be business as usual for the incumbent exchanges? Is MiFID yesterday's news? I wouldn't bet on it!

Juan Carlos Nieto

A Finextra member
A Finextra member 03 April, 2008, 15:52Be the first to give this comment the thumbs up 0 likes

Thank you Juan for your addition

Yes i agree that the ECN in the USA changed the structure but the point is that the traditional Exchanges stil flourish. It probably says more about the ability of ECNs to attract more business into the market and drive down costs and bring change.

I think the European market is much more complex and difficult to change. Even MiFID will take time in bringing the changes it promisses. So you need to have good lungs to see the changes likely.

I suspect that the European markets are going to take a different course to the USA and i hope and expect it to be succesful in attracting global investors away from other markets

Watch out for more consolidation of traditional Stock Exchanges as the ECNs bring greater threat !

Gary Wright

Gary Wright

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BISS Research

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