“Lobby wars” will hurt buy-side interests in Brussels says SunGard exec
Morgan: buy-side investors must speak up in Brussels
As the European Commission prepares new rules that will reform Europe’s capital markets, buy-side market participants must be careful to ensure that they are not misunderstood and even side-lined by politicians in Brussels, warns David Morgan, director for trading and client connectivity, capital markets at financial technology provider SunGard.
“In recent years, we have seen significant lobbying efforts by various different interest groups, including exchanges and banks,” he said. “What’s been surprising is that the buy-side has not until very recently raised its voice. That is a problem.”
Long-term institutional investors have expressed concerns in recent months that European legislators are ignoring their interests and taking an overly negative view of financial services firms in general, rather than listening to reasoned arguments about how to make markets work better.
In November, Christophe Roupie, global head of trading and securities financing, AXA Investment Managers, suggested to an audience in London that a dangerous lack of communication and understanding between trading market practitioners and rule makers in Brussels is threatening the effectiveness of the region’s capital markets. According to Morgan, the problem stems from an overreaction to the financial crisis, tinged with a lack of understanding about the role and contribution of different kinds of market participants.
“Even the buy-side tends to be perceived by politicians as part of the evil finance sector these days, so there is a feeling that Brussels isn’t listening to buy-side representatives when they try to put their view across,” he said. “Regulation should help the end-investor, but the buy-side are not seen as helping you and me – instead they are sometimes seen as part of the nefarious financial services industry. That needs to change.”
Claims that the buy-side are being ignored have been contested by Jasper Jorritsma, a policy offer at the EC, who told audience members at the same event that lobbying was not simply a matter of how many lobbyists an organisation or sector could mobile, but also of identity and whether or not the lobbyist was representing legitimate interests. “The buy-side does have a loud voice when it says something. They are very much heard,” he insisted.
However, Jorritsma was later heckled by audience members, who expressed outrage at his support for “Byzantine” proposals in MiFID II to force market makers to stay active in financial markets regardless of the prevailing market conditions.
At present, a large proportion of industry attention is focused on MiFID II, which is effectively the EC legislation that will set out the trading rules for European Union exchanges, brokers, asset managers and other market participants. It is the successor to the original MiFID, which brought competition between trading venues when it was introduced in 2007. The aim of MiFID II is to take account of the enormous changes in trading technology and market structure that have taken place over the last five years, including the rise of high-frequency trading, multilateral trading facilities, dark pools, broker crossing networks and the increasing usage of advanced trading algorithms.
According to Morgan, one of the key areas in which the buy-side needs to be heard is the debate over the role of broker crossing networks, non-displayed trading platforms used by brokers to cross client flow without paying exchange fees. As BCNs do not fall into any of the categories of trading platform identified by the original MiFID, they are effectively unregulated – a situation that the EC is keen to end in the upcoming MiFID II rules.
“BCNs are the loophole that brokers found in MiFID,” he said. “The regulation expected that they would set up systematic internalisers to do their in-house trading, but the SI category would have required them to publish prices for everything other than large size trades, which they didn’t want to do. These BCNs automated the broker’s upstairs trading operation, which had always existed, and made it much easier to match small orders that way too.”
The problem for the buy-side is that, under the latest draft of the upcoming MiFID II rules, MTFs must offer fair and open access to all market participants. That means they would be unable to exclude any potential counterparty from interacting on their venue, so long as that party conforms to basic trading rules. At a stroke, the rule does away with one of the strongest advantages of BCNs to institutional investors, who typically use them to minimise their market impact, in part by avoiding lit markets that might contain predatory high-frequency trading firms.
Institutional investors typically distrust high-frequency trading because they fear that predatory HFT firms are preying on their flow, trading against their orders and creating an adverse market impact that hurts their ability to trade in blocks. Senior buy-side representatives, including Adrian Fitzpatrick, head of investment dealing at buy-side firm Kames Capital, have characterised HFTs as predatory “vultures” that simply steal from long-term investors. According to Morgan, the danger of poor buy-side representation in Brussels is that investors will be forced to accept a new rulebook that takes away their preferred method of execution, i.e. executing orders algorithmically in the dark.
“The fact is that the buy-side likes the current facilities in BCNs to get the smaller dark algorithmic orders done,” said Morgan. “But without a reference price waiver, BCNs will have to publish prices. If the buy-side loses their favoured method of execution, this will bring fear and insecurity to the markets and will hurt liquidity.”
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.
