MiFID isn't like RegNMS

Standard practice in financial markets has been to look at what is happening in the USA, and then do the same.  After all, it’s the biggest market, isn’t it, so they must know best (?!).

I spent some time in Toronto last week discussing the changing regulatory environments in the USA, Canada and the EEA.  Many Americans who haven’t bothered to find out about MiFID have thought that it must be like RegNMS, partly on the principle that where the USA leads, the rest follow, but also partly because they couldn’t be bothered to read MiFID.  The big difference between the two is how they address best execution, so, as the heart of MiFID is best execution, that’s a pretty fundamental difference.

From the outside, it appeared that current Canadian regulation had the look-and-feel of RegNMS, but new regulations have taken on board some of the different approaches that MiFID introduces.  A key aspect of best execution regulation is – whose responsibility is it to provide best execution?  In RegNMS the execution venues themselves have to take on an important part of that responsibility, passing on orders to other competing venues if they can’t provide the best price themselves.  But MiFID isn’t about best price alone – it’s about best execution and the best overall result for the client’s portfolio.

MiFID puts the responsibility for providing best execution squarely in the lap of the firm that has the direct client relationship.  Plus MiFID is based on experience gleaned painfully from ISD over the last 14 years: as soon as ISD came in a number of governments and exchanges put up barriers to the competition that ISD was trying to generate.

The Canadian market is now creating new competing venues, like Pure and Alpha.  It’s interesting that MiFID is now in their thinking, and not just RegNMS.