In the aftermath of the credit crunch and near financial meltdown, it is very popular to castigate the financial services industry and particularly the investment banks and brokers for everything that happened. The media is full of headlines with stories of the blame game and fear of new innovative trading techniques. Within Europe, the credit crisis coincided with a time of huge regulatory transformation, the introduction of MiFID, “Markets in Financial Instruments Directive”, that has created competition and transparency in the equity markets for the first time. Those who had a dominance, and perhaps a complacency, pre MiFID have found their model challenged, particularly by the faction of the industry they like to hold most culpable for the crisis, the brokers, as well as a seemingly new set of unknown participants, the high frequency traders.
As a result, we are in danger of populist rhetoric and fear of the unknown driving the agenda of the development of the equity market rather than addressing the real issues that will ensure the fair and efficient operations of the financial markets envisaged by MiFID.
The aim of this report is to promote a wider understanding of the current state of the European equity market and its evolution which has brought us to the present status quo. It explains why, in the context of this evolution, there is less reason for knee jerk reaction and more time needed for a considered response to certain developments of the market and why perhaps other more fundamental issues should be addressed. The focus is on Europe but, with markets also becoming increasingly global, the development of the US market plays a significant part in illuminating parts of the story.
This 50 page report seeks to dispel three myths:
- High Frequency Trading is a new phenomenon and is a damaging and unnecessary activity on the market, harming both institutional and retail trading.
- Over the counter, “OTC”, trading and internalisation has increased since MiFID and is damaging price formation for the retail investor. OTC flow and regulated markets should be treated in the same way and be homogenised with equal constraints across the board.
- There is competitive clearing in Europe and clearing does not form part of the debate in the overall development of the Pan European market.
The report covers in clear and simple terms the evolution of high frequency trading, OTC trading and clearing before focusing on the current status quo. It comments on the key issues for the regulators and for the Pan European market as a whole.
Other relevant topics covered in the report:
- The Markets in Financial Instruments Directive, “MiFID”, Review
- FESE’s statements on OTC trading and dark pools
- Multi Lateral Trading Facilities’ “MTFs”‘ desire to level the playing field
- The European Code of Conduct
- Implications of the “Flash Crash” for the European regulatory framework
