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Monday, 22 October 2018

Day of the MiFIDs

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Too much information? Today is the day on which MiFID II finally takes effect. 

I have yet to find a single banker, broker or fund manager who does not believe it to be deeply flawed legislation but it is now in place and there is nothing to do other than get on and live with it. The fact that a number of government regulators are themselves not prepared for the implementation of the rules, that there is still a significant number of market participants who to this day aren’t sure themselves as to what kind of institution they ought to be classified as, let alone how others will classify and hence treat them, and in the end what the extra cost will be to the end user, is a different matter entirely. And finally, is more information to be provided under MiFID ever going to successfully translate into more transparency? All of this only time will tell. 

One simple thing remains: the denser the forest, the easier it is to get lost in it. Another is that with every rule there appears, in equal proportion, a set of loopholes. The more complex the regulation, the easier it is for those of dubious morals to hide in the cracks while the vast majority of players who are as honest as the day is long bite their teeth out while trying to get it all right and to comply with the regulation. Perhaps the saddest observation, from my parochial perspective as a life-long fixed income animal, an old bond dog, is that the lawmakers never seemed to have understood that bonds are bonds and that equities are equities and that their attempt at “legislative gender neutrality” makes a mockery of the entire process and demonstrates that if they can’t get their head around that simple axiom, there is little chance of them truly understanding much beyond. 

The issue of unbundling research still perplexes me, an issue which was captured in June last year by TwentyFour Asset Management when they wrote “Research unbundling is a legacy of how equity markets used to be traded. In fixed income the price of a bond is purely the price of a bond with no commissions and no taxes. Nothing is bundled. Banks and brokers do produce some valuable research which is written by some of the industry’s best talents, but much is for use in-house to support trading activities … . The banks and brokers are now struggling to work out how much to charge, and how much the buyside will be willing to pay for it.” If that isn’t a prime example of the generals preparing to fight the last war, what does? I suspect that by now we have all grasped that the largest generators of market risk are the central banks themselves but that the principal private sector participants in the financial markets will be facing the next set of challenges with at least one hand tied behind their backs. 

Alas, MiFID II, seven years in the making, limps into implementation today and it will not go away in a hurry. Speedy amendments to the sections that don’t work or the objectives of which are pie in the sky look unlikely and in the end it will be in the hands of the courts to rule on whether those in contravention are to be punished. One thing is certain and that is that there will be, under MiFID, no room for the likes of the brothers Salomon or Marcus Goldman and Samuel Sachs to start up in business and succeed on hard work and a spot of gratuitous risk taking alone. 

 

Flush

Enter, stage left: the disruptors. The blockchain revolution, with its cryptocurrencies and its ICOs, has already brought a new narrative to financial markets even before MiFID II had fully hatched. Bitcoin, already being touted in many corners as a busted flush, didn’t have a great first day’s trading as it briefly dipped below US$13,000 in Tuesday’s trading although at the time of writing is was on the way up again and stands at US$15,333.25. While detractors have taken the sharp decline in bitcoin into the end of last year as proof that it’s just a load of Mickey Mouse and a 48% peak-to-trough decline in intraday trading only reinforces their opinion that cryptos cannot be taken seriously. Others point to the volatility as proof that the price bubble, if indeed it was a bubble, will correct itself in an organic manner. I’d suggest that some of the critics look into German monetary history of the 19th century with its dozens of different local currencies, into the introduction in 1834 of the Prussian customs union and the subsequent creation of the German Reich under the stewardship of Otto von Bismarck and leadership of Kaiser Wilhelm I. 

If a currency is only a currency if it is regulated by a central bank, what were those thalers and kreuzers through which trade was conducted in those states and principalities for centuries before the introduction of the Reichsmark? Anyhow, the thaler did survive over the Atlantic and is today called the dollar. I digress. A currency is a commonly acceptable intermediary unit in the conduct of trade. Gold, as we know, is not governed by a central bank but it remains the currency of choice in a crisis not despite its not being manipulated by a monetary authority but because of that. Hence so many governments sit proudly on their gold reserves. Gold might not be virtual as are bitcoin, ether and the many others but it does fulfil most of the functions of a cryptocurrency and remarkably probably has more in common with those than it does with central bank-controlled and manipulated fiat currencies. 

As I am now no longer in the crosshairs of MiFID II and subject to its strictures I think I can say with impunity that at US$1,300-odd gold looks undervalued against the crypto complex and that somebody might do well to begin to quote the bitcoin/gold cross. 

Back to the main event. European asset markets struggled yesterday while US equities were straight off to the races with the Dow closing 0.42% higher, the S&P 0.83% higher and the Nasdaq closing above 7,000 for the first time at 7,006.898, up a whacking 1.5%. The S&P close was a record too and the Dow only missed by a whisker. Today sees the publication of the minutes of the December 13 FOMC meeting although I cannot see what immediate influence these might have on a market driven by unrelenting momentum. Without a doubt European markets will be playing catch-up today, whether they like the fundamentals or not. The principle that we hate these levels but that we still prefer to be long remains firmly in place.

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