London: Sweeping regulations designed to make markets more transparent threaten to erode the last bastions of European voice trading, from bonds to commodities.
Under MiFID II rules, which take effect in January, traders in the European Union will have to report a host of information to demonstrate they’re executing clients’ trades at the best prices and in the right venues. Tracking those details is faster and cheaper when the trades are done by computer, rather than by shouting down the phone.
“Voice trading will be reduced to those scenarios where it truly remains the most efficient way of finding and matching counter-party interest, at a cost,” said Svante Hedin, the co-head of trading for SEB Markets in Stockholm.
The impact will be felt in markets where voice trading still holds sway. Almost 90 per cent of European traders see corporate debt moving to electronic platforms, a recent survey by dark-pool operator Liquidnet Holdings Inc. found. While trading by phone or in person won’t vanish, it will diminish, traders said.
MiFID II, the revised Markets in Financial Instruments Directive, forms the centrepiece of European securities markets legislation. Largely developed in the aftermath of the global credit crisis, it’s intended to impose transparency and root out conflicts of interest in financial markets, with rules governing everything from dark pools to analyst research.
For securities firms, one of the biggest challenges will be setting up systems to move from a voice-driven trading environment to one that’s increasingly digitised to meet MiFID II’s data-reporting requirements. A number of financial technology companies have popped up to assist banks, brokers and asset managers conform to the new standards.
Goldman Sachs Group Inc. and BNP Paribas SA are among five banks that said in July they chose a firm, Droit Financial Technologies, to help them comply with MiFID II. New York-based Goldman Sachs is also an investor in the five-year-old Droit, whose software collects data in real time and automates processing to document trades in derivatives and other financial instruments.
“MiFID II is giving another push to a process which already started after the Lehman Brothers crisis,” Kevin Houstoun, the chairman of Rapid Addition, a company that offers electronic trading solutions, said in an interview in Barcelona. Houstoun, who formerly co-led the European equity electronic-trading team at Salomon Brothers in London, said the rules may squeeze banks’ margins as they offer more standardised products to clients.
The new rules may also force some voice brokers to seek authorisation from regulators to continue offering investment services. That’s a “costly and cumbersome” process that could drive consolidation, said Hedin at SEB.
Bloomberg LP, the parent company of Bloomberg News, provides execution for firms complying with MiFID II requirements.
The London Metal Exchange, one of the last outposts of open outcry trading in Europe, is bracing for the new rules on best execution, which threaten to upend some of its time-honoured practices.
The LME clerks who currently hover around the trading ring and record transactions on slips of paper, for example, may be equipped with hand-held electronic devices so that they can report transactions faster. While that may satisfy regulators, the creeping digitisation is worrisome, said Malcolm Freeman, director and chief executive officer of brokerage Kingdom Futures.
“One risk with best execution is that it takes the LME down the road of going fully electronic, with brokers just offering direct market access straight to the exchange,” said Freeman, who started his career as a floor clerk in 1974. “If that happens, we can close the floor and all just retire.”
Read here to find out how MiFID II will affect investment research
The LME, which traces its origins to the 16th century, insists that won’t happen. Ring trading “remains central to the LME price discovery process, and the benefits it brings with regard to transparency and price integrity fully reflect the principles behind MiFID II,” the exchange said in a statement.
Yet in an era of increasingly computerised trading, matching buyers and sellers in person or over the phone has been in decline. For some markets, MiFID may be the final blow. Most spot currency and stock trades, for example, are already done electronically.
“For 99 per cent of the business, the voice execution will disappear,” said Andreas Anschperger, head of currency trading in Frankfurt for Allianz Global Investors. “Very soon, it will completely disappear for opening new trades.”
There are illiquid markets, such as interest-rate and credit-default swaps, where voice broking will probably remain the norm. Chris Barnes, senior vice president for Europe at Clarus Financial Technology, based in Geneva, said he expects only a third of the euro interest-rate-swaps market to move to electronic trading starting in January.
Yet overall, MiFID II’s requirements for greater transparency in record-keeping, pricing and execution stand to make voice trading more costly and complicated.
“The industry is seeing big changes coming,” said Ashlin Kohler, who heads European rates & credit e-commerce for fixed-income market structure at Citigroup Inc. “The regulators want to encourage venue trading, and venue trading tends to be electronic.”