Latest surveys are beginning to show clearly that MiFID is failing to achieve one of the most important
objectives of reducing investor costs. One survey might be wrong but when the results are consistent we can rely on the overall
picture it is presenting. MiFID was always going to be a tough implementation because of its loose drafting designed to provide
markets and their participant's flexibility and scope to implement. All the EU states had to transform their legal and
regulatory interpretations to facilitate an EU wide harmonisation of markets. The facts are that in creating MiFID and allowing
markets and financial services firms too much licence to interpret the directive, European securities markets have become
unbalanced and destabilized.
The folly of the European Commission was to try and change the markets by creating
artificial demands thus weakening important market structures; particularly the Stock Exchanges. Say what you will about the
Stock Exchanges but they do offer consolidation and a central point of regulation. The MTFs and other commercial initiatives
designed to fragment liquidity have had a dynamic impact on the markets in a number of ways, unfortunately not all positive
or providing great news for investors.
Sure the Exchange costs have plummeted and this has been a huge benefit
to the sell side, mainly large banking institutions. Were they ever going to pass on cost savings to their clients? Did the
EU commissioners really think that banks would take such a charitable view?
The Best Execution article has caused
most debate and you would think that financial services firms would be able to produce a decent policy for their clients.
Wrong! The FSA review published this year shows that many firms are failing to produce coherent best execution policies for
their clients. If the client does not understand what the best execution policy is from their agent, how do they know if it's
failing? Where do they go to get a better deal? How can the regulator take sanctions against firms if their best execution
policy is just within the regulation but outside the spirit?
The buy side firms once managed the pricing policy
of their sell side agents by simply matching their executions against a consolidated tape, easily created from the central
source, the London Stock Exchange. Now with so many venues to try and find the best price they have a difficult if not
impossible task. Even if they make a huge investment in systems they are surely now in a worse position after MiFID than before.
Not all buy side firms will have the required financial position to invest in state of the art technology, so will muddle
along. Are they doing the best for their clients? Are they complying with best execution? Can the regulator take action? What's
the point if the MiFID cure is worse than the poison?
After creating the environment to allow the set up of new
trading venues, the situation is now becoming somewhat farcical, with some of the first venues up for sale and with the Stock
Exchanges more than likely to be their purchasers. Surely this will put the market structure back to where we started. The
Stock Exchanges will dominate, the new trading venues will eventually be bought or a least consolidate and there will be less
choice than today. However, the consolidation of trading venues will at least have the benefit of allowing an easier best
execution environment, thus we can expect to see the wheel turning full circle.
Apart from the problems of so many
trading venues preventing best execution or at least severely hindering it the clearing and settlement landscape has further
fragmented causing firms an increase in their operational costs. This cost has been passed back to the buy side which has
put them in a worse position than pre MiFID. There was a consolidation process beginning in the clearing and settlement industry
before MiFID that was stopped stone dead.
The creation of more trading venues with more diverse clearing and settlement
is increasing the costs and risks for the financial services firm and of course the investors at the end of the line.
The consequences of spreading assets across more organisations, is increased operational risk for the individual firm. With
client/trading positions being held across so many different depositories and with executions spread around the Stock Exchanges
and new venues the fragmentation of the European markets appears converse to the EU objective of harmonised markets. The question
has to be is it possible to keep individual EU markets bonded by a harmonised rule book, without throwing the baby out with
the bathwater by creating fragmentation and it's a game where the costs are always picked up the end customer.
Sadly this situation was predictable and many people went on record warning of the consequences of MiFID. The EU Commissions'
review of MiFID is due for publication in 2010 and it's a forlorn hope that the severe MiFID downside will be dealt with.
There is no reverse mechanism so we are stuck what we have. However, we can hope at least, that some very important fine tuning
will take place. For example the creation of a consolidated tape of all trading venues managed from a central source. This
should at least enable firms to produce clear and client friendly best execution polices and the regulator with a decent chance
of doing its job.
The clearing and settlement firms need to be encouraged to consolidate. Nationalistic protectionisms
should be outlawed and a free market environment created, enabling mergers and acquisitions in this area to begin.
The EU commission should take a more dynamic role in managing the EU securities markets towards change; this should include
all financial institutions being brought together in a harmonious management structure. A little like the conclave in the
Vatican. There should be close liaison between politicians and the EU finance industry, which links future policies in the
financial markets with those that are offering the services and are expected to bear the costs. And there should be an EU
financial ombudsman created that protects the rights of the investor, both Institutional and private, which has a central
point of contact for disputes and with power to take any case forward.
However, hope of this appears somewhat
forlorn, as I fully expect the EU politicians and the major financial institutions to remain with their present stance of
By Gary Wright, MSI