After three months, MiFID II still evokes mixed feelings and some components may need to be reviewed, but it has had some positive effects
More than three months have passed since MiFID II was implemented across Europe, but it is still far from certain that the comprehensive new rulebook is actually improving execution services and transparency for end investors.
At a panel discussion hosted by Trade Informatics, Eze Software and Plato Partnership in London on March 20, representatives of brokers, investment managers and software providers agreed that MiFID II so far has given rise to further fragmentation, patchy transparency and varying interpretation of key rules, calling into question the early success of the regulation.
One of the most significant changes heralded by MiFID II is the phasing out of broker crossing networks, the rise of systematic internalisers (SIs) and the reduced emphasis on dark pools as a result of the newly implemented double volume cap, which curbs the number of securities eligible for trading in the dark.
However, a lack of consistency in the interpretation of the rules means brokers and trading venues are operating in different ways across Europe, with some trades made visible immediately after execution and others remaining undisclosed. Panellists noted that the lack of consistency not only creates an uneven playing field but also leads to increased costs for market participants.
From a buy-side trader’s perspective, it is not always clear where to find the most reliable liquidity, and not all liquidity is immediately accessible. To connect to a SI, for example, commercial terms must be agreed in advance, so its liquidity is not typically as readily available as that of a multilateral trading facility.
Panelists agreed that those trading services that bring together natural buy-side interest in an accessible way offer substantial value, but the distinction between dark pools and some newer liquidity sources is not always clear. Some panellists felt an intraday periodic auction service that offers execution of larger orders with minimal market impact, for example, could reasonably be interpreted as a repackaged dark pool.
In addition to concerns over fragmentation and questionable transparency under MiFID II, questions also have been raised over the extent to which the collective investment that has been made in the regulation will pay off in the long term. The outcome that might best justify the investment would be for investors to receive an enhanced, more transparent service across jurisdictions and asset classes, but it is not clear at this stage that this will be achieved.
There are some reasons to be optimistic, however. While there are multiple components of MiFID II that have been challenging to implement, and where there is still room for improvement, the rules have led to much more rigorous practices on the buy side. This is in turn holding brokers and execution venues to much higher standards, which should ultimately be beneficial for the whole industry.
Unbundling of research and execution commissions has played its part too, because however much use a buy-side firm might make of sell-side research, the requirement to be charged explicitly for this research has removed the opacity that previously existed in some broker fee arrangements, making this part of the business fairer and more transparent.
And while liquidity may not always be as easily accessible as the buy side might desire, brokers report that risk deployment has increased since MiFID II came into force. Now that the rules are finally here, balance sheet capacity appears to be extending, and the industry is gradually beginning to find its feet again.
In the panel’s closing remarks, market participants were reminded of the need for proportionality. While it is easy to be overwhelmed by the challenges of MiFID II and to rush to implement new technologies and systems, every firm is different and the priority should be, as always, to carry out a proper cost-benefit analysis and invest in the tools that will be most relevant and beneficial in the long term.