Group Co.
Changing Tides in the Global Trading Landscape
Traders Magazine Online News, October 9, 2017
With capital markets becoming more and more global, it is impossible to limit regulations by geographical borders. So as new European-based regulations like Markets in Financial Instruments Directive (MiFID II) come into effect overseas, Canadian capital markets are undeniably affected.
Many rightfully will ask, what is MiFID? As well described by Thomson Reuters, MiFID I removed cross-border barriers to ensure safer, more transparent and evenly balanced European equity markets. MiFID II increases the transparency requirements, shifts trading toward more structured marketplaces and works to improve best execution, lower the cost of market data and provide more explicit costs of trading and investing.
From the trading perspective, the goals of MiFID II are simple: to provide greater transparency in trading decisions and emphasize the individual trader’s decision-making process. How will it do this? By de-coupling the research and trading relationship. Currently, the sell-side produces research for the buy-side “for free”, with the true cost built into trading fees. In turn, the buy-side compensates the sell-side firm by sending them their trading flow. In the post MiFID II-world, the sell-side will directly charge for their research. As a result, sell-side traders will have to compete for trading flow based on the value he or she – and the firm – provides to the buy-side.
This trend is already underway in Canada. An ITG survey published in May showed that 17% of Canadian asset manager respondents have already unbundled trading and research, while another 44% are planning to unbundle in the coming years.
Unbundling research will have a profound and lasting effect on the relationship between the buy and sell side. Buy-side traders will need to justify who they trade with and why. We see this as a real and positive opportunity for the institutional trader. A clear understanding of what best execution means, and how they are achieving it through trading activity, will be paramount to the successful justification of broker-dealer trading relationships. Thus creating an urgent need to place emphasis on best execution andquality execution.
Luckily for traders, a MiFID II regulation helps place focus on best execution. In addition to de-coupling the relationship between research and trading, the new regulations are designed to provide enhanced pre/post trade oversight, better define dark rules and address high-frequency trading (HFT) practices. HFTs will be expected to notify regulators with details of their trading strategies, demonstrate they tested their algorithms, and establish controls to reduce the likelihood of “Flash Crashes”. MiFID II also requires electronic trading firms with automated market-making strategies to provide liquidity on a continuous basis throughout trading hours. It’s worth noting that this requirement is very similar to the requirement NEO places on our market makers. A core aspect of a market maker’s role is to provide that liquidity safety net when and where it’s needed most.
At NEO, we find ourselves in the middle of this positive changing tide in global market regulation. From day one, quality of execution has been a key focus at NEO. Creating a healthier market through innovative solutions that encourage stable liquidity and mitigate predatory trading activities is and has always been our modus operandi. We are pleased to see the topic of best-execution coming to the forefront.
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