16 June 2013

Per Loven: European MiFIR regulation revision could risk savings

Writing for the FT, Loven says that if passed in its current form, MiFIR II could bolster high-frequency trading companies that trade on public stock exchanges at the expense of the individuals the regulation aims to protect – namely, millions of Europeans who invest in pension funds.

In its latest compromise text, the Irish presidency of the council proposes volume caps for certain pre-trade transparency waivers that were granted under the previous legislation, currently used by off-exchange venues. First, the imposition of these caps and the potential suspension of these waivers would provide asset managers with less flexibility over how they execute the trades. This would force them towards public exchanges where their orders become the prey of high-frequency traders. 

Second, it would prevent off-exchange trading venues from offering a better price to savers who entrust their pensions and investment assets to fund managers.

The proposal effectively neglects to take into account the primary reason asset managers trade on off-exchange venues: public stock exchanges cannot protect asset managers’ orders from market impact, which is the adverse price movement that results when a large order is exposed to HFT and other market intermediaries.

In addition, off-exchange venues can reduce trading costs for end investors through price improvement.

At a time when many people in Europe are worried about their economic future, it is curious that their representatives would consider passing a law that increases their trading costs, in effect creating a tax on savers’ returns and reducing the value of their retirement and other investment accounts. Why would lawmakers mandate that money be redistributed to HFT companies or other intermediaries, instead of helping to preserve the savings of the pension holder?

A further concern is the increased risk to the market that would result if the proposal were adopted. Rules that make it harder for institutions to trade out of positions unnecessarily increase market volatility, to the detriment of overall market stability.

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