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What's the point of MTFs?

When MiFID was written one of its objectives was to create increased competition to the Stock Exchanges. The view being that the Stock Exchanges were operating in what looked like a monopoly and with mergers they would be creating further monopolistic positions. This was considered bad for investors as it limited choice and forced acceptance of the Stock Exchange services at whatever price they chose to charge. These views were not unreasonable in the eyes of politicians and others who had a moral basis for their actions. I have no doubt that for many investors the introduction of increased competition was appealing. But as the old saying goes ‘be careful what you wish for’.

Stock Exchanges are financially ancient organisations. Set up hundreds of years ago with a purpose of creating an organised market, under simple rules that protected investors, they were central to the wider creation of the market. In the central market there were single capacity firms; Jobbers that used their own capital to offer two way prices, bid and offer and Brokers that acted only as Agents for their clients and charged commission. The outer market was a mixed bag of Fund Managers working for organisations like Pension Companies and on a smaller scale those providing advice like accountants or lawyers, this is not a comprehensive list, but you see my point. Market structures and the firms making up the inner and outer markets remained the same for hundreds of years. Sure things went wrong and there was a fair share of frauds and bounders that would take the attention of the financial pages and either lose their job or end up in jail.

The big change in the City of London was ‘Big Bang’ 25 years ago that opened up the Stock Market membership to domestic and foreign banks. All the former family run firms and partnerships were bought by these powerful banking organisations and single capacity quickly changed to duel capacity. The lines of responsibility between Jobbers now called Market Makers and Brokers now called Broker Dealers became blurred. Investors/clients were confronted with Banks that were acting on both sides of the fence and so they had to rely on Chinese walls and a whole raft of rules which were introduced for the protection of their interests, and hopefully the integrity of the bankers acting for them.

New technology advancements and especially PCs and the Internet allowed the creation of new complicated derivative products and massive increases in international trade. Further still the banks had all grown huge with control of investor’s assets and powerful execution capabilities globally. The drive to capture more orders and continually increase the speed of execution also allowed for internal crossing of orders to be executed by the bank. The problem was that this was invisible to the market and in effect created a secondary dark market.

The dark market found its spark of creation back in the pre Big Bang days when Jobbers were given a time dispensation to execute large orders before the market knew about them. This was to protect the Jobbers from market manipulation if the market was aware of large buy or sell orders. This was fine when the Jobbers capital was at stake and it was miniscule in comparison to today. It has to be questioned if the same level of protection is warranted today as Banks are dealing in massive size and this encourages increased risk taking. That’s another story!

MiFID has tried to tackle the transparency problems and increase competition, so that investors get a better deal and they can see they are. In fact they can’t and don’t get the benefits that were envisaged when MiFID was drafted. MTFs did create competition and they did increase transparency in one way, but the alternative view is that the central market provides tradition transparency and providing there are plenty of Market Makers competition. All the MTFs were commercial opportunistic creations to take advantage of MiFID and in fact we have already seen a number be bought, making their creators a handsome profit and in time no doubt all MTFs will be bought or merged. So has the MiFID objective been met? It’s both yes and no. It did achieve the original objective but has created an almost identical result for the investor as pre-MiFID.

Markets operate best when there is good communication and good data and transparency in price. In all these factors MiFID has made transparency more difficult and expensive to achieve by introducing so many different electronic trading venues and has encouraged further use of Dark Pools. Market Data has been increased to swamping levels making it more difficult to find the data that is needed and the requirement for expensive new systems. Communication that should be exceptional given technology advancements is actually a cause for concern and risk. A central market provides all that MiFID was looking for and it simply had to modify a few rules rather than create massive market structure changes, at great cost and risk. It’s likely that MTFs will eventually disappear and Stock Exchanges will once again rule the roost.

So what has it all been about? It’s been about lack of knowledge and understanding of markets, greed, business protection, personal glory, profit and political interference on a grand scale. What it has not been about is providing the investor with what they need and want. Did they ask for MTFs? Do they need them and does the market operate better with them? Come and join the debate at the next Post-Trade Forum on MTF’s v Exchanges on the morning of 29th November at the London Stock Exchange.


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Gary Wright

Gary Wright


BISS Research

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19 Sep 2007



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The Post Trade Forum's aim is to propagate debate and discussion between senior practitioners in Post Trade Operations in the global securities market; to bring about increased awareness and knowledge across both buy-side and sell-side financial institutions in financial products and be a focal point for firms and practitioners to air views.

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