Regulation

Institutional investors remain frustrated with European regulators, says Greenwich

Only six per cent of the buy-side respondents to a new Greenwich Market Pulse believe that institutional investors have had a meaningful influence on the legislative process that is working to produce new MiFID II rules.

According to the study of 103 institutional investors by Greenwich Associates completed mid-October, only 11 per cent of respondents thought that sufficient consideration was being given to the needs of pension funds and other beneficiaries of long-term institutional investment in the legislative process surrounding MiFID II / MiFIR.

Equally concerning is that 70 per cent of respondents thought institutional investors have had little or no influence in the process, with only six per cent expressing the belief that the buy-side has had a “significant” or even “modest” influence.
 
Investors approached in the study were divided on whether the broker community had been influential in the process, with 43 per cent saying they had little or no influence and 38 per cent believing that the sell side had modest or significant influence. In contrast, the Greenwich Market Pulse reported that 70 per cent of respondents thought that European stock exchanges had a modest or significant influence on the direction of MiFID II regulations. Remarkably, 68 per cent of respondents said that stock exchanges had a greater influence on the regulations than the regulators themselves.
 
At the centre of the ongoing MiFID II / MiFIR negotiations are proposed rules around areas such as high-frequency trading, tick sizes, the ability to access broker crossing networks, and the availability and cost of post-trade market data. While these subjects are technical in nature, they also have political ramifications that are not lost on any of the regulators and policy makers.
 
“There is no doubt regulators are being cautious and want to ensure every possible avenue of excess risk-taking is looked at very carefully. Balancing that with institutional investors’ aspirations remain a challenge,” says Greenwich Associates analyst Kevin Kozlowski.
 
MiFID II / MiFIR introduces a new type of regulated trading venue, the Organized Trading Facility (OTF). By introducing the OTF, the regulatory proposals seek to improve the transparency of trading activities in equity markets, including “dark pools.” Under the current proposals, an OTF operator, which is usually a broker-dealer, would be prevented from trading against its capital. But this could lead to drying up of market liquidity to the detriment of institutional investors. For this reason, the OTF rules are a political hot potato.
 
The response from the buy-side community is clear on this issue. Sixty four per cent of the institutional investors studied by Greenwich Associates said that their ability to execute in dark pools or crossing networks would be negatively impacted, while only 11 per cent thought the rules would have a positive impact in this area. Without the ability to trade large blocks with brokers, there is a concern among the buy side that it will be much harder to conduct business efficiently. Seventy four per cent of respondents said that access to traditional over-the-counter services, such as capital commitment and block crossing, would be negatively impacted by the proposals. Only four per cent said that the proposed rules would be helpful.
 
Forty two per cent of respondents had concerns that the MiFID II / MiFIR regulations would negatively impact their ability to access pre- and post-trade data on reasonable terms, compared to 13 per cent who believed they would have a positive or very positive effect. Broadly, traders have been asking for a single consolidated tape that brings together prices from various venues. The net effect would be less cost incurred on price discovery by trading firms.
 
To curb serious arbitrage-related volatility in the markets, MiFID II has recommended imposing a minimum tick size in less liquid stocks in Europe. A tick size is the minimum increase by which a share price can move higher or lower. High-frequency traders have collectively brought down tick sizes over time to attract liquidity, but it has also led to excess volatility and driven some investors out of certain market names, regulators contend. MiFID II has also mooted a minimum resting period for which an order remains open on an exchange reduction in tick sizes. The study reveals divergent views on how much benefit these restrictions will bring to end-investors.

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