One year into MiFID, some “amazing inefficiencies” have been dispelled from the European equities market; but the level of competition it has induced is on the brink of going too far, according to Eli Lederman, CEO of broker-backed multilateral trading facility (MTF) Turquoise.
“The single most positive thing about MiFID is that it has been effective in its intent to protect end-investors,” says Lederman. “It is a testimony to MiFID’s success that we went live in 13 countries in one week. That wouldn’t have been possible pre-MiFID, and investors in stocks from all of those countries now benefit from consistent price improvement.”
Since its official launch on 26 September, Turquoise has quickly reached a regular daily market share of between 3.5 and 4.5% of the 300 most liquid European equities, and up to 6% of FTSE 100 volume. Although encouraged by its results so far, Lederman says recent market volatility has limited Turquoise’s market share.
An increase in trading venues vying for the same markets naturally breeds liquidity fragmentation. Although competition to incumbent exchanges has resulted in technological and cost improvements to the European equities market, the Turquoise chief considers liquidity to be in danger of becoming too dissipated.
BATS Europe, was latest to enter the market on 31 October, making it the fourth European MTF so far, behind Chi-X, Turquoise, and Nasdaq OMX Europe, with another two expected by the end of year.
“It’s unclear how many MTFs the market can support, especially in this lower volume environment,” says Lederman. “If there are too many MTFs that have the same functionality, it’s inefficient and fragmentation for the sake of fragmentation. Banks and brokers should draw the line somewhere and make rational decisions about whom they need to connect to.”
At this point in time, Lederman considers MiFID to have actually solved fragmentation in some respects.
“If you wanted to trade bank stocks across countries previously, you had to connect to a dozen or so domestic exchanges,” he says. “At the moment, you now have the choice of pan-European platforms that are supported by pan-European clearers. In this respect, MiFID has eliminated some amazing inefficiencies.”
The principle of best execution – which requires each broker to detail how they intend to get the best trading results for end-clients – is also an area where Lederman thinks MiFID has been successful so far, despite some observers criticising its ambiguity.
“I think best execution has worked well,” said Lederman. “It’s not overly prescriptive and the regulation fundamentally recognises that it is a competitive business and people are going to compete on execution quality and be more analytical about it.”
As MiFID moves into its sophomore year, Lederman says two challenges need to be addressed. Uniform adoption across all member states is one. “We look forward to trading in Spain,” he notes. However, a more pressing matter is interoperability between clearing and settlement firms. This is an issue that has become more prominent in recent weeks, following an announcement by the London Stock Exchange on 24 September to introduce a competitive clearing model.
Such initiatives from national exchanges will not be enough to prevent the migration of liquidity to alterative platforms, according to Lederman. Although they compete fiercely for liquidity, the MTFs have clubbed together to solve another unintended consequence of MiFID: fragmented trade reporting. A working group of prominent MTFs has been established to create a consolidated tape, similar to the US market, which will ensure price formation is not restricted to the primary exchanges.
“The move to a consolidated tape will have implications for how indices and fund values are set and how benchmarks like VWAP are calculated,” says Lederman. “Reference prices will have to take MTFs into consideration in a more standardised way, which will reduce the primacy of incumbent markets.”
So, although MiFID has provided end-investors with some tangible benefits, Lederman admits there is still some work to be done, and not just from a regulatory perspective. “As good as equities trading is relative to other asset classes, there is still room for improvement,” says Lederman.