French regulator raises temperature of debate in London

The French regulator says action is needed to preserve markets

A heated argument that erupted between panellists at an event in London yesterday signals deep divides in Europe over the role that financial regulators should take as France and Germany introduce their own national rules.

During a discussion at a SunGard “Meet the Regulators” event at London’s Andaz Hotel, Philippe Guillot, executive director of the markets directorate at French regulator AMF was expressing his support for the introduction of new rules in Germany that aim to control high-frequency trading, when he was interrupted by fellow panellist William Garner, solicitor at UK law firm Speechley Bircham, who strongly objected to “excessive” regulatory intervention.

“Badly drafted, rushed legislation brings problems,” said Garner. “For example, short-selling regulation has proved disastrous for UK SMEs, because it priced out the main market makers. Managing minutiae should be left to the market. We should not over-regulate.”

Garner was backed up by Richard Gardiner, policy advisor at the Federation of European Securities Exchanges, who also questioned whether regulators should be getting involved in the details of market microstructure. “Isn’t it for venues to decide how to run their own markets?” he said. “This is minutiae. Leave the final decision to the exchange.”

However, Guillot countered that action was necessary to protect a fair and equal mix of different market participants, including retail investors, long-term institutional investors, large banks and other participants. Adding that delays to the European rulemaking process had already prompted several European nations to go their own way by introduction national legislation ahead of MiFID II, he suggested that more immediate, prescriptive regulatory intervention was needed.

“This is too important to be left to the market,” he said. “Market structure is all too often used as a competitive advantage by someone desperate enough to destabilise the market. Do we have to wait two years for MiFID II, or should we do something as quickly as possible? We need the regulator to safeguard against that kind of distortion.”

Guillot’s comments alluded to the fact that in 2009, MTFs BATS Europe, Turquoise and Chi-X Europe became embroiled in controversy over their reduction of tick sizes. The move by the MTFs to offer trading in smaller increments initiated a brief tick size war between rival trading venues in Europe, including NYSE Euronext, sparking fears of a ‘race to the bottom’ in which liquidity would be fragmented into infinitesimally small increments for the sake of competitive advantage. The issue was eventually settled by an agreement between Europe’s trading venues, arranged with help from FESE, that has held ever since.

At the heart of Guillot’s argument was the concept that governments and regulators should take a proactive approach to regulation, intervening where necessary to ensure the smooth running of capital markets. Yet despite his support for swifter, more prescriptive regulation, Guillot also acknowledged that independent national action carried a risk of its own, since it could produce differing approaches in different countries – the very opposite of the harmony that was originally intended for MiFID II.

In Germany, the parliament is currently reviewing national proposals to control high-frequency trading in the country, including the introduction of order to cancel ratios, a registration requirement, and the obligation to disclose information on algorithms and trading strategies to the regulator. Italy’s Borsa Italiana already introduced order to cancel ratios in April last year at the prompting of Italian national regulator Consob; meanwhile, France unilaterally introduced a financial transaction tax in August without waiting for a pan-European agreement.

While some heads of trading at UK asset management firms have recently expressed support for greater controls on HFT on the grounds that long-term investors are currently being disadvantaged by predatory HFTs, even the representatives of different European regulators at the London event were unable to agree on how far the regulators should get involved.

“We don’t agree with the AMF that the regulator should control every aspect of the market,” said Christina Ploom, risk analyst at Swedish government body Finansinspektionen. “The problem is that the law of unintended consequences is against us if we get too detailed in our rulemaking.”

MiFID II, which is currently being negotiated between the European Parliament and the Council of Ministers, is expected to take effect in 2015 and 2016, according to the latest estimates from Kay Swinburne, MEP and member of the European Parliament’s ECON Committee.