Worst of MiFID II Likely to be ‘Watered Down’, Says Prop Trading Chief

Terry Flanagan

Some of the more controversial measures surrounding high-frequency trading in the current MiFID II proposals, which promise sweeping reforms to Europe’s capital markets, may well not make it into the final document, according to the head of a European prop trading group.

Last month, the European parliament almost unanimously endorsed its version of the MiFID II text, which has provoked controversy within the financial services community, especially with its tough approach to super-fast trading and what the parliament views as the predatory nature of HFT.

High-frequency trading is being regulated for the first time under MiFID II—as the practice was in its infancy when the original MiFID document entered into force in 2007—with the most controversial measure in MiFID II the potential introduction of a minimum resting time for orders to remain valid on an exchange for at least 500 milliseconds.

However, the European parliament’s version will most likely not be the final version to come out of Brussels. MiFID II is expected to come into force some time in either 2014 or 2015.

The package adopted by MEPs in October will now be used by the parliament in negotiations with the Council of Ministers, which represents the executives of the 27 member states. The Council is due to finalize its own position on MiFID II in the coming weeks and then both institutions will have to come to agreement with each other at a series of meetings known as trialogues with the European Commission, the other main body in Brussels, before MiFID II can enter law.

“The parliament is obviously a very politicized body and has chosen a number of quite impactful methods to slow down markets, including the minimum order resting time of 500 milliseconds which the industry widely agrees will be ineffective, as well as order cancellation charges,” said Remco Lenterman, managing director of IMC Trading and head of the FIA European Principal Traders’ Association (FIA Epta), a proprietary trading group which represents firms that trade their own capital on European exchange-traded markets such as Knight Capital, Optiver, Getco, Citadel Securities and Quantlab Financial, at the recent FIA Expo conference in Chicago.

“But what we have to realize is that because parliament is the most politicized of the bodies [in the European Union], it will probably be as bad as it can get. You will probably see a bit of moderation from that going into this trialogue—a lot of the original proposals will hopefully be watered down.”

This, though, is hardly helping the industry in Europe much as many market participants are being left in a state of limbo as many of the regulations, including MiFID II, which are set to hit in the coming months and years, are still being debated in the corridors of power in Brussels. And whatever their final outcomes, it seems that these new regulations will hit hard regardless.

“Regulatory uncertainty is huge in Europe and there is also a lot of new stuff that is coming out from individual countries,” a London-based market source told Markets Media.

“The latest thing to hit is the Italian transaction tax and some of it feels quite reactive. A lot of the regulations are being either rushed through or, in the case of MiFID II, the feedback that is coming from the industry is falling on deaf ears a little bit because there seems to be a determination to pursue a specific agenda.”

The looming specter of the financial transaction tax in Europe, which is set to be introduced in 11 of the 27 member states—with the Netherlands possibly adding to that number—is also causing real concern to many market participants.

The new FTT proposals are a French and German backed initiative that promises a two-speed Europe in which many of Europe’s biggest stock markets—including Frankfurt, Paris, Milan and Madrid—will be affected by the tax, while others, such as London, will not.

Of the 11 EU nations to support the introduction of a financial transaction tax, several have even started to introduce the levy unilaterally. France, which has had its scheme in operation since August, is the most advanced. Although once the 11-nation FTT proposals are firmed up, countries like France will have to revert to the new EU proposals.

The original European Commission proposals for an EU-wide levy, which would have been vetoed by the U.K. and Sweden among others, promised a 0.1% tax on all share and bond transactions and a 0.01% levy on derivatives trades.

There is still some confusion as to how the revised plans will look and when it will even be up and running.

“The big question is what form it will take,” said Lenterman at FIA Epta. “The original Commission proposal was for every single transaction taking place on every instrument. That would be very impactful. The French have introduced something akin to the U.K. stamp duty [a reserve tax of 0.5% on share transfers] and that is less impactful and they also have market-making exemptions and exemptions on intraday trading.

“The final outcome of this will probably be somewhere in between these two opposite models. But where the outcome is going to be is very interesting and up for debate.

“It is hard to put a real date on its introduction, too, but I would have thought something by the end of 2013 we will see something that is standardized between those countries.”

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