News
BackIn the high times of faith in the financial markets, it was considered the epitome of modernity and progress. The Markets in Financial Instruments Directive, also called MIFID, wanted to put an end to the conservative way of trading in securities via old fashioned stock markets. These were to be replaced by new trading platforms, which would liven up competition. Now it has become evident that the sorcerer's apprentice is out of control. The authorities are lacking supervision and overview and the jungle of providers has created new business opportunities for profiteers, who, being equipped with ultrafast computers, exploit minimum price differences. Commission and Parliament now want to backpaddle.
The "Markets in Financial Instruments Directive" (MIFID, also called "Financial Market Directive") was adopted in the 2001 high times of faith in financial markets; however, it came only into force in 2007, 6 years later.
The Commission and the Member States were not in favour of leaving trading in securities to the monopoly of the stock markets, but wanted to see it deregulated and liberalised. The ban on trading shares outside state-supervised stock markets was lifted by the MIFID.
Subsequently, the liberalisation of the securities trade has led to the creation of a large number of so-called alternative trading platforms (electronic stock markets, multilateral trading platforms, etc.), which increasingly fuelled (price) competition with traditional, regulated stock markets.
A major aspect of the "liberalisation" of the securities trade was the question of supervision and regulation. The newly created trading platforms were able to gain a significant competitive edge from the fact that they were only subject to a slimmed down version of the stock market regulation. However, not without an important disadvantage: the supervision of trading and pricing as well as the detection of price manipulations, if at all, can only be achieved with great difficulties.
It is therefore no surprise that following the introduction of the MIFID, the new trading platforms quickly nibbled away large chunks of the traditional stock markets. The regulation competition heading downwards - the so-called "regulatory arbitrage" - subsequently also led to the fact that the regulation of traditional stock markets was gradually scaled back.
The financial market lobbies time and again argued that competitive pressure would lead to a wider choice for investors and lower prices. An argument that does not really hold. On the contrary, the emergence of different trading places made pricing significantly more complex, incurring substantial costs for the investor looking for the lowest price. The French financial market authority for example voiced strong concerns regarding the integrity of the market and the pricing process.
That private investors and small investors gain very little from the much hailed price reductions through more competition goes almost without saying. The reason being that they are not allowed direct access to alternative trading platforms. And as fee-related examinations clearly show, banks and brokers using such platforms very rarely pass on lower fees to private investors.
However, the new complexity of the trading platforms has brought a new kind of speculators to life, the so-called arbitrageurs. With the help of superfast computers they are able to exploit price aberrations between trading platforms and stock markets for their own benefit. Meanwhile, according to branch estimates, the so-called high-frequency trade accounts for 60 to 70 % of all transactions. The business model is simple: low margins, but high volumes. Many a mickle makes a muckle. These new revenue opportunities have nothing to do with the real economy, but contribute to confusion and instability of the system. Therefore, labour representatives demand the Europe-wide introduction of a Financial Transaction Tax, which would make such phantom deals significantly less attractive.
The issue of the main profiteers of the new trading platforms must also be addressed. In many cases, the alternative stock markets are established by the banks themselves. For example, the alternative exchange giant Chi-X is owned to third by the Japanese investment bank Nomura, other shares are held by Goldman Sachs and UBS. Banks also establish new trading platforms to lower trading fees and to bypass regulation - of which they are the greatest beneficiaries.
The large number of problems, which arose by the step towards deregulation by the Commission and the Member States, now causes the Commission to reflect and rethink the issue. The Commission wants to review the Directive and has started a comprehensive consultation.
This week, the European Parliament has dealt with the issue. The MEPs have approved of an own initiative report by the British Conservative MEP Kay Swinburne, who calls for regulating and supervising alternative trading platforms in future in the same way as traditional stock markets. The intention is to turn back the wheel of deregulation, which in practice has turned out to be an ideologically tinted wrong track. One can only hope that politics will assert itself against the resistance of the financial industry.
Further information:
Consultation document of the European Commission on MIFID
Press release of the der European Commission on MIFID
Report of the European Parliament (Kay Swinburne) on Regulation of trading in financial instruments
The Commission and the Member States were not in favour of leaving trading in securities to the monopoly of the stock markets, but wanted to see it deregulated and liberalised. The ban on trading shares outside state-supervised stock markets was lifted by the MIFID.
Subsequently, the liberalisation of the securities trade has led to the creation of a large number of so-called alternative trading platforms (electronic stock markets, multilateral trading platforms, etc.), which increasingly fuelled (price) competition with traditional, regulated stock markets.
A major aspect of the "liberalisation" of the securities trade was the question of supervision and regulation. The newly created trading platforms were able to gain a significant competitive edge from the fact that they were only subject to a slimmed down version of the stock market regulation. However, not without an important disadvantage: the supervision of trading and pricing as well as the detection of price manipulations, if at all, can only be achieved with great difficulties.
It is therefore no surprise that following the introduction of the MIFID, the new trading platforms quickly nibbled away large chunks of the traditional stock markets. The regulation competition heading downwards - the so-called "regulatory arbitrage" - subsequently also led to the fact that the regulation of traditional stock markets was gradually scaled back.
The financial market lobbies time and again argued that competitive pressure would lead to a wider choice for investors and lower prices. An argument that does not really hold. On the contrary, the emergence of different trading places made pricing significantly more complex, incurring substantial costs for the investor looking for the lowest price. The French financial market authority for example voiced strong concerns regarding the integrity of the market and the pricing process.
That private investors and small investors gain very little from the much hailed price reductions through more competition goes almost without saying. The reason being that they are not allowed direct access to alternative trading platforms. And as fee-related examinations clearly show, banks and brokers using such platforms very rarely pass on lower fees to private investors.
However, the new complexity of the trading platforms has brought a new kind of speculators to life, the so-called arbitrageurs. With the help of superfast computers they are able to exploit price aberrations between trading platforms and stock markets for their own benefit. Meanwhile, according to branch estimates, the so-called high-frequency trade accounts for 60 to 70 % of all transactions. The business model is simple: low margins, but high volumes. Many a mickle makes a muckle. These new revenue opportunities have nothing to do with the real economy, but contribute to confusion and instability of the system. Therefore, labour representatives demand the Europe-wide introduction of a Financial Transaction Tax, which would make such phantom deals significantly less attractive.
The issue of the main profiteers of the new trading platforms must also be addressed. In many cases, the alternative stock markets are established by the banks themselves. For example, the alternative exchange giant Chi-X is owned to third by the Japanese investment bank Nomura, other shares are held by Goldman Sachs and UBS. Banks also establish new trading platforms to lower trading fees and to bypass regulation - of which they are the greatest beneficiaries.
The large number of problems, which arose by the step towards deregulation by the Commission and the Member States, now causes the Commission to reflect and rethink the issue. The Commission wants to review the Directive and has started a comprehensive consultation.
This week, the European Parliament has dealt with the issue. The MEPs have approved of an own initiative report by the British Conservative MEP Kay Swinburne, who calls for regulating and supervising alternative trading platforms in future in the same way as traditional stock markets. The intention is to turn back the wheel of deregulation, which in practice has turned out to be an ideologically tinted wrong track. One can only hope that politics will assert itself against the resistance of the financial industry.
Further information:
Consultation document of the European Commission on MIFID
Press release of the der European Commission on MIFID
Report of the European Parliament (Kay Swinburne) on Regulation of trading in financial instruments