Thursday, 17 January 2019

Miffed about MiFID

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Today I write my last column under the Sol Capital banner.

The great dream we had of creating something better, as every start-up business aims to do, in the fixed income broking arena has largely been smashed by ludicrous construct that styles itself as MiFID II. Sol will carry on in its own way but the model we had aimed to expand around has been reworked and Sol is expanding into other areas. Thus I move on wishing all the very best for the future to the principals who remain behind. I, for my part, am hoping to have sifted through the options and to have chosen my own path forward before too long. *

MiFID, MiFID, MiFID…. I have yet to find one serious market professional who feels that the planned introduction of this Gordian knot of a legislative joke can be effected without serious disruption to the wellbeing of those it is supposed to be protecting. Totaling over 1,600 pages, it is easy to get lost in the detail of these documents, which cover a range of topics including investor protection, transparency, transaction reporting, algorithmic and high-frequency trading, commodity derivatives, and non-discriminatory access to trading venues and central counterparties (CCPs). In the centre of the legislative body lies the flagrant misconception that transparency guarantees liquidity although anyone who has ever dealt in financial markets anywhere away from the great mainstream knows this to be a fallacy. 

Nine years ago we were racing into the greatest banking crisis since the aftermath of the crash of ’29. The legislation that is currently being introduced, which is supposed to prevent a repeat, is clearly another vainglorious attempt at refighting the last war. The crisis was brought upon us by the big and powerful banks: the likes of Goldman, Morgan Stanley, Citigroup, Deutsche and RBS. The total collapse of markets was avoided by the small broker-dealers who were not hamstrung by the billions of dollars of balance sheet losses which, had it not been for serious government intervention, would have not only been brought to their knees but who would, as happened to Bear Stearns and Lehman Brothers, have died where they had fallen. 

MiFID II, willingly and for all intents and purposes malevolently, aims at putting the small firms out of business while ceremoniously handing the keys to the asylum back to the lunatics. Paid-for research is a fiasco in the making, taking away from smaller firms one of the areas where they could meaningfully and successfully bite the ankles of the big guys.


Hung out to dry 

The trade-reporting process is to become so perfect that many firms struggle to work out how they will ever be able to afford the infrastructure required to satisfy the small-minded civil servants who have dreamt it up. I have seen numerous attempts to foster equity market-like trade reporting to fixed income over the decades and all have failed to deliver anything more than significant revenues streams for IT providers. The cost of all this nonsense has to be borne by someone, and that someone will ultimately, once again, be Joe SixPack Saver or Jim SixPack Investor. 

Part of the process is the introduction of the Legal Entity Identifier or LEI, a unique registration number that every market participant has to have. Holders of an LEI are not permitted to trade directly with any entity that does not have one. Globally, there are assumed to be around 2m institutions that need to be issued with an LEI. I understand that 10 weeks before the system is introduced, only around 600,000 have so far been assigned. No doubt the likes of Goldman and BlackRock are okay but once again the little chaps are being hung out to dry by the authorities. 

Around 3,800 years ago the Code of Hammurabi was chiselled into stone. In it murder was banned and punished severely. Despite many legislative incarnations since we still have murder in our societies. Likewise the financial services sector has always had its rotten apples, as has every other sphere of business. My guess is that 99% of us are as honest as the day is long. As for the other 1%, they will be crooked irrespective of how tightly the law is formulated. 

MiFID II makes life difficult and unpleasant for the overwhelming majority of decent, hardworking people in the world of finance but it’s unlikely to stop the crooked ones who won’t give toss, one way or the other. Whipping an entire industry because one rates trader promised another one a steak dinner if he could help to get Libor to move a hair’s breadth one way reeks of supreme pettiness. So holding a government, a legislature and an entire people to ransom over millions of dollars, pounds or euros of taxpayers’ money in flagrant acts of pork barrel politics doesn’t count as doubtful practice, does it? 

MiFID II will see small, independent firms pay the price for the misdeeds of the Wall Street and City behemoths. Legislators will sit there, smiling like Cheshire cats, watching the costs being borne by those whose money they are supposed to be safeguarding. The collective guilt of the banking community has prevented it from speaking its mind about the madness of MiFID. It’s hard to push back when you’re still standing on a slippery slope. 

Thus I finally leave the world of independent broking and the sharp end of financial markets, having started as a cub international banker at the back end of the 1970s. But still I will not sit and silent I shall not be. The world moves on and I will move with it. Back soon.

* This paragraph was amended to reflect Sol Capital’s expansion into new areas.

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