The Transatlantic Influence of MiFID II
While MiFID II may have been implemented and enforced solely within the EU, its effects are starting to extend beyond European borders.
A recent report published by the TABB Group, entitled ‘US Institutional Trading 2018: Adapting to New Reality’, has shown that 87% of American asset management firms either expect to be or currently are impacted by MiFID II’s regulatory framework despite not being legally obliged to comply. This belief is shared both by firms with European exposure, and by smaller, regional firms with no international presence whatsoever.
American firms are implementing a number of different procedures and practices so as to better comply with MiFID II. For one, a much greater emphasis is being placed on automation and algorithmic trading. A central tenet of MiFID II is achieving best execution. This pressure to achieve best execution is largely responsible for the push towards algorithmic trading; algorithmic trading is easier to analyse quantitatively, free from the possibility of human error, and perhaps most importantly, lower cost.
Reducing the cost of trading is vital owing to the fact that MiFID II has also resulted in the unbundling of research from execution fees. With research now being priced and sold individually, an increased degree of scrutiny is being placed on the value of said research. This has resulted in a total overhaul of the established research model, with the buy side cutting over 31% of their research providers in 2017. With this in mind, the funds freed up by adopting algorithmic trading allows better and more selective allocation of funds for research purposes.
The push towards automated, algorithmic trading also makes sense with regards to MiFID II’s insistence on transparency. By automating trading, firms are able to make their trading strategies more easily quantifiable, and are thus able to be more transparent about their trading procedures.
Considering how widespread these changes are, it is worth questioning why American firms are adopting MiFID II’s regulatory framework. There is no legal obligation on the part of these firms, and in many cases these alterations are proving difficult to implement. Why, then, would so many firms actively decide to comply with these regulations?
While there is no legal obligation on the part of US firms to adhere to MiFID II, there are competitive pressures which encourage them to do so. MiFID II’s insistence on transparency, best execution, and detailed transaction reporting are extremely appealing prospects for both potential clients and potential investors. As MiFID II continues to become increasingly ubiquitous, investors are becoming increasingly insistent that American firms adhere to its guidelines. It seems that in order to succeed, American asset managers may be forced into complying with MiFID II so as to make themselves more attractive to potential investors.
This compliance has not come without difficulty, however. Indeed, only 27% of firms who took part in the TABB Group survey believed that they would see any benefits occur directly as a result of MiFID II. Dayle Scher, the author of the TABB Group survey, writes that ‘it’s hard to convey the anxiety that traders are feeling relative to MiFID […] They are really sitting on tenterhooks waiting to see the impact’.
Regardless, it seems undeniable to state that MiFID II is having a genuine, tangible, transatlantic influence and is fundamentally altering the way American asset management firms conduct their business. How positive this change will be, and how well these firms will cope, as of yet remains to be seen.