The revised EU Markets in Financial Instruments Directive and its associated regulation (MiFID II/Markets in Financial Instruments Directive Regulation) brings far-reaching change to Europe’s trading and investment landscape, according to the London Stock Exchange Group (LSEG).
LSEG released an industry paper regarding the second Markets in Financial Instruments Directive (MiFID II), six months after its implementation date in January 2018.
The report identifies six key themes from the first six months of MiFID II and offers insights to help the industry going forward with comment from industry experts from LSEG, Invesco and Redburn, among others.
Although MiFID II had an effect on almost all intermediaries and asset managers involved in the European investment industry, the regulation includes some specific changes for equity market participants, reducing ‘dark’ trading options, increasing reporting requirements and introducing new rules on best execution, algorithms and research commissions, all of which LSEG covers in the paper.
LSEG said: “The new MiFID II era is very much in its infancy. Many of the new rules and processes are yet to bed down and may need further clarification, much of the new data being generated needs greater scrutiny and analysis.”
In its research, LSEG found the combined impact of MiFID II regulatory reforms can present liquidity challenges for small- and mid-cap stocks, but new technology-driven research, trading and education solutions are helping to encourage activity.
Where trading was concerned, LSEG said: “MiFID II’s best execution and reporting requirements means trading decisions are driven by data more than ever and trading protocols and mechanisms will emerge and evolve across asset classes as trading venues and liquidity providers innovate to broaden the range of execution options.”
Niki Beattie, CEO of Market Structure Partners, suggests that markets have not yet become more transparent to end-investors.
She said: “We now have a highly complex and opaque market structure. In the equities market, trading on some venues and SIs is not being conducted in keeping with MiFID II.”
“In other asset classes, much of the activity on multilateral venues is in reality bilateral because of its reliance on credit relationships. Trading venues and brokers are innovating to attract business, but the overall effect in not necessarily improving outcomes or transparency for end-investors.”
According to Scott Bradley, head of sales and marketing for cash secondary markets at London Stock Exchange, buy-side firms are now increasingly more comfortable trading larger sized blocks electronically.
The new requirement to take “all sufficient steps” to achieve best execution, rather than “all reasonable steps”, as under the original MiFID, has raised the bar at buy-side trading desks, according to Paul Squires, head of Europe, Middle East and Africa at Invesco.
The report also covers the subject of adapting RFQ to equities, central clearing, ease of use, anonymity issues and the range and depth of liquidity.
One example of innovation is London Stock Exchange’s plans to launch an RFQ-based service for equities.
LSEG said it’s new platform will allow for transparent competition within an efficient, highly automated workflow.
Concluding, Niki Beattie, CEO of Market Structure Partners, said: “New reporting requirements are always challenging due to the number of dependencies involved, and it may be necessary for regulators to issue more guidance.”
LSEG added: “Six months into the MiFID II era is a suitable time to pause, reflect, and—most importantly—plan for the future. The first six months of MiFID II suggest that the LSEG’s relationship-led approach has set us on the right course to help our members and stakeholders to operate efficiently and thrive in the new environment.”
“In consultation with the market, we have developed innovative solutions that provide flexibility as clients look to deliver value to their own end-customers while meeting regulatory obligations.”
“MiFID II will remain an ongoing compliance challenge for regulated firms, both due to its sheer scale and the evolving regulatory status of instruments and institutions.”
