Good intentions – bad results

Christian VoigtLobbying  in Brussels can be such a dirty business. Hidden agendas and vested interests are dominating the daily business. Thus, I was very pleased when Finance Watch (a non-industry lobby group, the lobbying arm of Occupy Wall Street, if you will) engaged in their mission to “making finance serve society”. However, the dream of a better world was crushed last week when Finance Watch published their MiFID II position paper called “Investing is not betting”. This paper reflects a shockingly low level of understanding of operational workings in financial markets and a high degree of social romancing. The recommendations in that paper are, at best, only weakly supported by academic findings and are hardly practically applicable. The negative fallout from their recommendations will most likely outweigh any positive gains.

To give you some examples, here are a few of the recommendations from Finance Watch:

“Forbid Direct Electronic Access (DEA)” : This is plainly quixotic and ineffective. Firstly, the proposal  would effectively ban retail traders from accessing markets. If that recommendation was to be enforced, then you would have to go to a local branch of your bank (if it still exists) and fill out a PAPER form every time you wanted to trade some shares. Secondly, most successful HFT firms (granted not all, but still most) operate already under their own name. The lowest possible latency is only achieved when trading in your own name.  Thus, this ban would only affect a hadful of small HFT firms, and many other non-HFT businesses.

“Forbid privileged access to venues’ order book, including flash orders.”:  This seems to be incorrect. I have never heard of flash orders in Europe. Additionally, there is no privileged access to venues. MiFID states today, that MTFs and RMs must have non-discretionary access.

“Apply a minimum size threshold for all pre-trade transparency waivers.”: This is an extremely wide ranging recommendation. It covers (among many more things): iceberg orders, stop orders, midpoint orders, and trades done via RSP model (Retail-Service-Provider). Many of those functionalities are used very frequently by retailers. For example the stop order is a good way to protect yourself against large losses after investing your GBP 1,000 savings into a stock.  Unfortunately, GBP 1,000 will be below any size threshold, even though it is a high investment for a small retail investor. But according to Finance Watch, that retail investor should be banned from protecting himself from excessive losses. This makes no sense!

To conclude, I’m sure Finance Watch meant well and their intentions for the MiFID II position paper are all honourable, but the results are pretty questionable.

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