The MiFID II trading transformation is now well under way. By studying trends from the original MiFID regulation in 2007, research by Greenwich Associates offers valuable insight on the approach of fixed income, derivatives and exchange-traded funds to regulatory change, e-trading and best execution.
- A report by Greenwich Associates compares MiFID I and MiFID II data, and uses buy-side interviews in order to understand and forecast MiFID II trading trends.
- The trends in equities seen after MiFID I in 2007 point to an increase in electronic trading and some venue fragmentation in the asset classes now covered by MiFID II.
- Executing OTC is quite onerous, further motivating market participants to shift trading toward electronic venues that naturally facilitate time-stamping and reporting.
The first year of MiFID II saw the markets cope well with implementation, but of course not without some teething issues.
MiFID II is not perfect and indeed as we have seen, in February 2019 with ESMA yet again deferring the Systematic Internaliser thresholds for derivative instruments, it is incomplete. As ESMA voices concerns over market transparency, we know MiFID II will be revisited with already unofficial talk of MiFID 2.5 or III.
But with only one year in, can we make informed predictions about the evolution of the markets? By examining the impact that MiFID I had on equities and analyzing MiFID II trading trends, we think so.
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Our research study with Greenwich Associates compared trends from MiFID I to MiFID II, using quantitative data from Greenwich as well as our Market Share Reporter data and interviews with buy-side traders in Europe to gain their views on the impact of MiFID II.
Below is an excerpt from the report: The MiFID II Trading Transformation.
Lessons from MiFID I
The lessons of MiFID I informed us to expect an increase in electronic trading for newly covered asset classes, and preliminary data is already showing the beginning of this trend.
European cash equity markets had originally been reordered with the first MiFID back in 2007.
This initial set of rules specified new requirements around trade transparency and defined the types of venues that could trade equities, including formalizing a rule set for multilateral trading facilities and broker crossing networks.
In addition, the MiFID I regulations officially defined “best execution” for the first time in European equities, setting a benchmark that investment firms were now obligated to strive for.
With increased scrutiny on the execution process and liquidity fragmented across a greater number of venues, buy-side traders increased their usage of electronic trading channels.
From 2007-2010, according to Greenwich Associates data, buy-side usage of e-trading rapidly increased from 10 percent to 25 percent.
The changes brought about by MiFID I led to an overall improvement in market structure, but in the eyes of the European regulators, it was not without some unintended consequences.
MiFID I led to a dramatic proliferation in execution venues, which increased by over 73 percent following the implementation.
MiFID II trading trends
MiFID II brought other asset classes into scope, including fixed income, derivatives and exchange-traded funds.
By following the playbook for equities market structure after MiFID I, we can expect to see an increase in electronic trading and some venue fragmentation in the asset classes now covered by MiFID II.
In addition, the MiFID II pre- and post-trade transparency rules are significantly more stringent.
For all transactions in covered instruments, the prevailing price in the market must be checked and recorded prior to executing the deal.
Afterwards, the trade details such as price and quantity need to be publicly reported via an approved publication arrangement or other mechanism.
Complying with these reporting requirements when executing OTC is quite onerous, further motivating market participants to shift trading toward electronic venues that naturally facilitate time-stamping and reporting.
The MiFID II trading transformation
Download the full Greenwich Associates report — The MiFID II Trading Transformation — to see the findings and analysis of key topics including electronic trading and best execution.