In Europe 2014 has been the year of MiFID II, with the year opening with the landmark political agreement in the second week of January, and the second consultation paper (technical standards) approved by ESMA on the 18th December – just in time for Christmas. February saw our colleagues in the OTC markets experience the first of many missed 2014 reporting deadlines under EMIR, and the heightening of discussions about alignment (or lack thereof) between SEF and OTC definitions. Like MiFID II, the discussion of how to implement regulations across borders (primarily EU-US) has been key throughout this year: a question I have often heard asked at conferences and by the media. It seems obvious to us that with close economic ties between EU and US, maintaining the ability to align the markets is crucial, but it still seems to be proving a regulatory headache to achieve.
The first ESMA consultation paper on MiFID II, all 800 pages, naturally occupied a large part of the summer for EPTA. As industry associations joined together to create a group response to reduce time pressure, EPTA was pleased to be invited to draft the entries on automated trading. This opportunity brought us closer together with many of our industry colleagues and gave us the chance to share our expertise on automated trading and thoughts on the future direction of the markets.
Of the many studies on HFT released in the last quarter of 2014, the ESMA study into the extent of HFT use in European equity markets brings with it some of the most interesting results for the progress of legislation and understanding modern market structure. By comparing different definitions of HFT ESMA observed wide variation in the levels of HFT activity, with the most significant differences in recorded levels being shown when HFT activity by investment banks is also included (not shown under an HFT flag approach). With the widespread misapprehension that HFT is a type of trader as opposed to the use of high speed technologies and the extent to which it is spread throughout the markets, we hope that this research from ESMA will help to finally rectify this error.
It’s hard to look to 2015 without thinking about MiFID II: as with 2014, it will be the focus of our attention for much of the first half of the year. The challenge with MiFID II, for all participants, is to work towards greater transparency and competition, ensuring that end customers get the best deal, and building on the progress made on this in 2014. Our concern, shared across market participants, is to secure the liquidity of the markets for the next few years: naturally MiFID II is key to this. We hope to see an outcome of MiFID II that all market participants will be able to live with for at least another 10 years, this means an outcome that is more forward looking, more challenging: we’re not just looking to maintain the markets, we all need to move them forward, and this will be reflected in our response to the consultation. We are concerned that too much trading will happen in the dark, or through internalized platforms, leading to a drop in the number of participants in the central market, meaning less liquidity and less transparent markets. This must be avoided at all costs, and both the Commission, EU Parliament and ESMA need to be focused on this goal.
In addition to MiFID II, later in 2015 we will be focusing on discussions around CRR / CRD IV capital requirements legislation. We will also be watching with interest as discussion around dark pools and broker order matching for institutional investors continues: it is good to see that investors are now demanding greater transparency over whether their brokers are giving them the best deal.
The coming year will, I think, mark the move towards the period of post-financial crisis regulation, and will lead to the new shape of our financial markets in Europe. There are some challenges ahead for all as we strive to achieve a competitive and transparent marketplace, but it’s an exciting time, and I hope will bring the markets out stronger and prepared for an increasingly-automated future.
The views expressed in this blog post are the personal opinions of the author and do not necessarily reflect the official policies or positions of the FIA European Principal Traders Association or the Futures Industry Association.
