After years of anticipation, MiFID rolled into action on Nov. 1. The Markets in Financial Instruments Directive is a set of rules developed by the European Commission, the European Union’s policy arm, that lays the groundwork for an eventual overhaul of the European markets.
MiFID’s goal is unprecedented but simple. It seeks to create a single European market for trading and securities in lieu of 30 segregated domestic markets–the 27 EU countries, plus Iceland, Norway and Liechtenstein. It expects to do that by foisting competition on the mainline exchanges that have a monopoly position in their markets.
MiFID’s biggest change to the status quo is the abrogation of so-called concentration rules. In France, Italy and Spain, trades by domestic brokers previously had to take place on the national exchange.
Other markets can now compete with those exchanges. Transactions can also be internalized by brokers. “It’s almost impossible that there won’t be more off-exchange trading in those countries,” says Nick Holtby, head of European client trading and execution at UBS. Big brokers are setting up dark pools in Europe, and U.S.-based crossing platforms such as ITG’s POSIT and Liquidnet are expanding their London-based footprint to the Continent.
The permission to open up trading, however, doesn’t translate into direct competition between the kingpin exchanges. So far, the biggest exchanges are sticking to their domestic knitting, trading equities they list and not going after other trading.
But MiFID also gives a green light to new markets and venues, called multilateral trading facilities, or MTFs. Eager new players, such as Instinet’s Chi-X, have sprung up. Launched in March, Chi-X went after trading in Europe’s most liquid stocks, adding the component stocks of the benchmark index in one country after another. Chi-X’s monthly turnover in October was 14 billion euros, up 27 percent over September’s turnover.
Turquoise, an MTF created by a consortium of nine giant broker-dealers, has run into setbacks, but remains ambitious. The platform, which will include both a displayed market and a block crossing platform, expects to launch in mid-2008. New exchange Equiduct intends to go live early next year with a market model tailored to the new environment.
Meanwhile, the standard-bearer exchanges are readying for battle. The London Stock Exchange, Euronext and Deutsche Bšrse are each considering new order types, new ventures and new businesses to keep liquidity within their markets. Exchange operator NYSE Euronext–perhaps after seeing close-up the erosion of the New York Stock Exchange’s market share in response to market-structure changes–announced it would form a block trading platform with BNP Paribas and HSBC. The system is due to launch in the second quarter of 2008.
The general expectation is that eventual competition will fragment Europe’s market, although perhaps not to the extent it’s happened in the U.S. In the meantime, brokers are revving their engines. They’re developing or adapting U.S.-tested smart order-routing technology for European trading. Algorithms will also become more important, as traders look for ways to stitch liquidity back together.
But many in Europe don’t expect the main exchanges to bleed volume. European markets are in a different position from their U.S. counterparts, and may not be as vulnerable to competition from upstarts. “I doubt they will attract enough liquidity in a broad range of equities to provide significant order-book depth,” says Andreas Willius, an executive in the cash-equities segment of Deutsche Bšrse.
MiFID is also prompting changes in two other important areas: market data and clearing and settlement. MiFID doesn’t mandate a consolidated quote or trade system, leaving it to markets, brokers and vendors to pick up the slack. As a result, myriad businesses are being hatched around the provision of market data and related services, most notably a consortium called BOAT. Clearing and settlement remains a historical challenge to efficient cross-border trading in Europe.
However, last year, with MiFID on the horizon, the European Commission forced key players to agree to a code of conduct intended to gradually eliminate barriers. That move produced cautious optimism from many quarters. “It will take a long time to assess whether this will result in real competition,” says Patrick Cirier, global head of professional trading group solutions for Fimat, the brokerage arm of French bank Societd Generale.
