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Research and the Right CHOICE
Traders Magazine Online News, June 22, 2017
Research. CHOICE Act.
Two great propositions that go great together?
Research is an integral part of the trading process. Making the right choice in which to select, how to implement and execute completes that methodology. The U.S. equity market structure is among the most dynamic and fluid, if not the most complicated in the world. And in the next six to 18 months, it could see a pair of new regulations or statutes that could be the most significant since the implementation of Regulation NMS on July 10, 2007. These two rules – the Markets in Financial Instruments Directive II, set to go into effect in January and the Financial CHOICE Act, which is currently making its way in bill form through Congress – could shape the way traders and the sell-side conduct business into the foreseeable future.
A Review
In looking at MiFID II, which is a result of the European Securities and Markets Authority, has global implications despite its origins. The rule applies to all firms that trade in European markets, which includes but is not limited to the U.S. The rule mandates that sell-side brokers can no longer bundle execution and research costs into one lump payment. Rather, both are separate costs and must be publicly disclosed to promote market transparency and accountability.
MiFID II most prominent effect is on the research , namely how it is paid for and just how much is actually paid. For traders, regardless of jurisdiction, research drives the trading bus and anything that affects its provision is cause for concern.
Specifically, MiFID II states that Investment firms should account for research as a fixed, predictable cost, not linked to execution costs or otherwise subsidized. Also, the cost of research should be either be a core management cost or be fully transparent to investors, thus removing any conflict of interest. Lastly, a transparent, priced market should emerge where the cost of research is linked to the quality and quantity of goods and services supplied (and the value derived to investors).
The Financial CHOICE Act is a slightly different animal than its MiFID counterpart. First, CHOICE is a response to the Dodd Frank Act and not a continuation like MiFID II. Also, CHOICE (as of this writing) is not law and has no implementation date – rather after just passing a full House vote is in bill form until the Senate decides what to do. The CHOICE Act faces an uncertain future in the Senate where Democrats are broadly opposed to the legislation and their votes are needed to pass it.
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