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  • Scott McLeod

MiFID II update

The FT article "Mifid II starts to weave its influence through markets" was published recently. Link is here (subscription required).

My comments...

The combined aims of protecting investors and improving competition was always going to be problematic. In particular, the view that price discovery and trading on a lit venue will equate to better outcomes for investors is overly simplistic.

Dark pool volumes have fallen dramatically (an intended outcome) but trading off-exchange (OTC & auctions) have increased (not an intended outcome). There are many different reasons for both buyers and sellers to choose a trading venue, whether they be lit or unlit. Minimising implementation shortfall is perhaps paramount but generally *all* participants want to minimise *all* costs associated with execution.

Reporting requirements for fixed income are causing problems. Only 220 or 0.3% of the 71,000 bonds surveyed are subject to real-time reporting but the remainder have a 2 day price reporting limit (volume up to 4 weeks). According to those interviewed, that delay is too short. Any trader with illiquid positions will tell you that it takes some time to move that risk off your book. As a result, some banks are either not quoting or have widened spreads which is definitely not an intended outcome.

ICMA's survey prior to MIFID II being introduced showed that firms expected (1) research budgets to stay the same or reduce & (2) how to price research was the biggest challenge. Comments from the article & from contacts in the research/brokerage industry suggest that one of the significant unintended consequences of the regulation has been to reduce the number of investors using research as it now carries an explicit cost.

Finally, as happened with Dodd-Frank, data collection is not standardised so is difficult to collate for comparison & analysis. Which then makes it very difficult for regulators to determine which part of the regulation is behaving in the intended way. And more importantly which part is not and why.

The data will provide the key to future MiFID revisions & improvements.

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