Tan: “regulation has caused a loss of way”

Discontent with regulation cast a cloud over delegates on the first day of the TradeTech conference in London, as senior industry executives pondered on the politicisation of the debate and the perceived failure of regulators to deliver efficient markets.

“Regulation has caused a loss of way,” said Kee-Meng Tan, head of electronic trading at broker Knight Capital. “We all want efficient markets, and for that to happen we need competition, a diverse pool of participants, cost efficiency and transparency. But those ideals have become lost, partly because of very strong lobbying from vested interests. Legislators are playing politics, and now MiFID II overlooks the retail investor.”

MiFID II is the European Commission’s attempt to respond to changes in financial markets technology and practices since the original MiFID of 2007. MiFID II attempts to harmonise Europe’s financial markets, and provide a rulebook for how exchanges, MTFs, brokers and other market participants should interact with each other. Originally intended to champion greater transparency and to help protect the investor against unforeseen dangers such as the ‘flash crash’ of May 2010, the document has since become a symbol of political wrangling, industry lobbying, frequent amendments and dissatisfaction from market participants. According to Natan Tiefenbrun, chief executive at MTF Turquoise, the biggest problem is that the regulatory process has been hijacked for the narrow commercial benefit of some participants, rather than to improve safety.

“In the US, venues including NYSE Euronext and BATS Global Markets are arguing for rule changes that would allow lit and dark venues to live side by side, but in Europe, NYSE Euronext and Deutsche Börse are pursuing changes to the rules that will largely eliminate dark trading,” he said. “So, they are eliminating choice in Europe by effectively reintroducing the concentration rule by the back door. It’s very discouraging.”

Similar sentiments were shared by Mark Hemsley, chief executive at BATS Chi-X Europe, who said that the new rules on dark trading contained in MiFID II would mean that some trading activity would cease to happen, some would be traded over the counter, some would relocate offshore and only the remainder would transfer to the lit market as intended.

“We are about to create an even worse market structure,” he said. “What should happen is that we allow lit and dark orders to operate I the integrated books, with priority to the lit orders. If you have specialist orders, let them go to the dark.”

Panellists also debated the role of the original MiFID in bringing competition to European equity markets, with the consensus of opinion holding that competition had brought positive results. Nevertheless, Michael Krogmann, head of cash sales market development at Deutsche Börse, pointed out that regulators still need to provide balance between the benefits and potential dangers of a fragmented equity market structure.

“I believe in the public good of transparent price discovery,” he said. “MiFID brought trading costs down and it made exchanges do a better job. It also brought fragmentation. That’s not bad per se, but you do need transparency to overcome the bad effects of fragmentation. Concentrating liquidity in one transparent order book has a true value for the market.”

To support his case, Krogmann added that while equity markets had continued to function throughout the financial crisis, there were times when market participants could not trade other instruments such as bonds, because there was no transparent price available.

However, Turquoise’s Tiefenbrun countered that more competition was needed in derivatives, and criticised what he characterised as “closed silo monopolies” in the asset class. Estimating that the industry could save approximately €500 million through more competition in the clearing and trading of derivatives, he added that business models built on barriers to entry and shareholder return over customer costs could not succeed in the long run. “That money would come straight out of the pockets of exchanges who are currently enjoying abnormal returns,” he said.

MiFID II is currently due to take effect in 2015/16, according to the latest estimates from the European Parliament.