A couple of years ago the more principle based regulatory structure of Europe was all the rage, but the credit crisis of 2008 has changed the playing field. Now, fast on the heels of U.S. financial reform (see “Dodd-Frank: Moving from theory to practice”), the European Union (EU) completed a review of the Markets in Financial Instruments Directive (MiFID). While the review left MiFID with considerably more oversight power, it has left some analysts wondering if the cost may be too great.
In the most recent move, the very shape of European regulation has begun to change. “The European approach had always been principles based. They would say ‘you should do this or that,’ and it was up to you to implement a way of meeting the expectation of the principles,” says Jay Gould, head of the investment funds practice at Pillsbury. “Now, we see a move toward much more detailed guidance.”
One area that has received considerable attention is high-frequency trading. Under the new rule proposals, high-frequency traders will have to fully explain their trading algorithms’ design and functionality to regulators before they can be used in markets.
Miranda Mizen, head of European research at TABB group, explains the potential challenge. “If you have to explain your algorithm to the regulators, then that assumes the people you are talking to can react very quickly and understand what you are trying to do. There is a lot of burden of responsibility being put into one place,” she says.
Unlike in the United States, the EU seems to be working to consolidate regulatory authority among both member nations and asset classes. “What we are looking at is an objective of creating a single rulebook at a European level. That has big ramifications because we’re still talking about sovereign states,” Mizen says.
While the attempt at creating pan-European supervision has already brought advancements, any move is going to face difficulties. “[Pan-European regulation] is going to create friction among the different countries as they each have different economic, social and political outlooks,” Mizen says.
As in the United States, numerous unknowns continue to haunt market participants. Chief among these concerns is what new market structures will look like. “Will trading costs go up or down? Will it be harder or easier to find liquidity? Will the obligations surrounding quoting requirements and registration create the framework to contain risk or will it remove liquidity from the market because the requirement is too onerous?” Mizen says. “What the market structure will look like needs to be clearly understood.”
While these questions still exist, a disposition to work with other nations is evident. “There is a real willingness among regulators across borders to work together. There seems to be more unanimity of though with respect to macro issues than there has been in the past,” Gould says.