by Luke Jeffs, Financial News
10 Dec 2009
The financial crisis of the past two years has rewritten the rule book on trading. Combined with the unintended consequences of the far-reaching rules introduced by MiFID two years ago, the crisis has also thrown up a number of challenges for traders and clients. As the dust begins to settle on the financial crisis, Financial News, supported by SunGard, organised a private invitation-only seminar for the heads of trading at some of the biggest banks in the market. Transparency, the benefits of competition versus the risks or fragmentation, and the implications of over-regulation were some of the challenges discussed.
Below is a summary of the main themes discussed:
The sponsors view:
As liquidity becomes more fragmented there is a greater need for real-time transparency across orders and trades to optimise decision making and control positions. Based on market feedback, SunGard has identified four core areas of competence required for position control, the first, Trade Execution and Price Distribution is addressed here in a breakfast briefing held in London at the end of November, where the heads of trading at some of the world's largest banks agreed the European equity market has changed beyond recognition since the introduction of MiFID two years earlier.
Growing complexity
Europe's largest brokers agree that the equity market has become a lot more complex in the past few years but they agreed it is their responsibility to work with their customers and regulators to help them understand the impact of changes. However, they argued that there are improvements that can be made. They said there is still too much double reporting of trades executed away from exchanges, which is confusing traders, customers and regulators as to what is going on at any given time, and called for a concerted approach to new standards. One head of trading at a large European broker argued if the largest 15 banks were to agree and start using a standard then the rest of the market would be compelled to follow. But a fellow panellist questioned this assumption, arguing an industry-wide approach would be more effective. Question of trust
However, the breakfast club agreed that part of the solution was working with clients to help them understand their obligations when it comes to trade reporting, and in other areas of the business, such as trading in dark pools.
The brokers knew clients are suspicious of these opaque trading platforms and feel that the brokers are taking advantage of their flow to benefit their in-house proprietary trading desks. They said that client trust is at an all-time low based on the perception that smaller tick sizes, fragmentation and dark pools are playing into the hands of the brokers. But they feel that clients' concerns will subside over time. The panelists were wary about the prospect of increased regulatory oversight, however, the Committee of European Securities Regulators, backed by national regulators such as the Financial Services Authority, has been increasing its scrutiny of dark pools in recent months.
The risk of over-regulation
The traders said, however, that there was a danger the regulators were over-reacting and looking to impose rules on a market that has always existed. They also expressed concerns over the technical understanding of these complex systems by the regulators. One trading chief said that in a room of 30 regulators you'd be lucky if three or four knew what they were talking about, an anecdote that resonated with the other panelists. An issue for the brokers is the FSA’s principles-based approach to regulation with one delegate arguing that stricter rules would be easier to follow.
Also, some brokers expressed a concern that European exchanges were looking to use the planned review of MiFID next year to enforce tighter conditions on the new breed of pan-European trading platforms known as multi-lateral trading facilities. Virtually all of the MTFs have set up in London and the feeling was that European stock markets are going to use their political leverage to slow or stop the flow of business to the city.
Competition versus fragmentation
There was also debate about the future of these new trading platforms, a point highlighted by the news that the LSE was nearing a deal to buy Turquoise, the bank-owned trading platform.
The brokers, many of whom are involved with Turquoise, as well as its rivals ChiX Europe and Bats Europe, questioned what level of business was required to make an MTF viable given the immense pressure on trading fees. The brokers, mostly from large investment banks, also predicted tough times ahead for smaller agency brokers that struggle to compete in terms of the technology spend required to deal with the fragmenting market. One large agency broker echoed these thoughts, adding that some of the smaller agency brokers will have disappeared a year from now. The traders, almost of all of whom handle exclusively equities and equity derivatives, also said there were some interesting opportunities to export the European market model into other asset classes. One argued that foreign exchanges, a market dominated by a handful of broker-led solutions, would benefit from the sort of competition that has emerged in the equity market.
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