Nikkie Beattie, managing director at the Market Structure Practice and chairman of TradeTech Liquidity, voiced what many delegates must have been thinking for much of 2011 during her opening address: “These are challenging times.”
Her statement echoed sentiments expressed at many events in this year’s conference season. It is with good reason – the eurozone is still in turmoil as state leaders continue to thrash out an agreement as to its future, while the sovereign debt crisis continues unabated in the US. These are indeed challenging times for all market participants – whether you are a banker, regulator, politician or consumer.
It was unsurprising that against such a volatile backdrop, regulation was at the heart of the TradeTech Liquidity agenda and opening panel, which featured Kay Swinburne, member of the European Parliament’s Committee on Economic and Monetary Affairs, and Valerie Ledure, senior policy officer of the Securities Markets for the European Commission.
The recently unveiled Markets in Financial Instruments Directive (MiFID) II was the topic in the first session of the event focusing on market data surrounding trades and the management and quality of this information. Swinburne suggested that data quality in the equity space has fallen since the implementation of the original MiFID legislation in 2007 – but the revisions of the rule should see this trend reversed. She said: “Quality of data is key. It needs to be standardised so it can be then consolidated effectively.”
Ledure said that the original MiFID succeeded in introducing more competition to the market place, but this means that there is now more fragmentation because of the greater number of trading facilities. This in turn provides a headache for regulators and could potentially lead to increased market volatility.
“Common standards need to be applied to the market, while data surrounding trades needs to be readily available at an affordable price,” she explained. Swinburne added that due to the amount of market participants the legislation has to satisfy, an “optimistic” timeline for full implementation of MiFID II is 2014.
However, in the ‘Evaluating the ‘three flavours of fragmentation’ and the future of the European execution landscape’ session, the panel was critical of regulators’ attempts to implement new legislation.
All agreed that the idea of a financial transaction tax on trades, recently discussed by the UK government, was unworkable. However, some felt that it could happen as political parties look to stand apart from one another in a bid to attract votes. In the current climate, Owain Self, managing director and global co-head of direct execution and global head of algorithmic trading at UBS, described such a tax as “politically popular”.
The panel also suggested that while the emphasis of debate over new regulation has moved from increased competition to increased transparency, many watchdogs do not understand what it is they are trying to regulate. Self said that Swinburne’s claims that data quality had gone down since the introduction of the first MiFID were simply not true.
“There was no data available before MiFID. So its introduction has increased transparency in the market place and helped reveal the mess that we were already in,” he said.
Elsewhere, technology was under the magnifying glass during various panels – but with the message being that it should not be blamed for volatility. Instead, technology should be seen as an enabler used to implement a trading strategy – and if there is any volatility in the market as a result, then the blame should be pinned on the operator of the strategy rather than the strategy itself.
In the ‘High Frequency Trading (HFT) bubble’ panel, Manoj Narang, founder and chief executive officer (CEO) at Tradework, explained that it was a misguided notion to think that high frequency traders were to blame for excess instability in the markets. Previously, commentators have attempted to link the flash crash on the Dow Jones Industrial Index of last year with the trading practice.
He quoted figures from his company’s research which showed that there was a 65 per cent increase in volatility after the markets had closed post-2007 when compared with between 2001 and 2006. This was compared to a 12 per cent increase in volatility seen during market hours.
“HFT has become a convenient scapegoat for policy makers or money managers. In fact it is the herd-like behaviour of investors which is the root cause of market volatility,” Narang explained.
By Jim Ottewill