History doesn’t repeat itself, but it does rhyme

While I’m not suggesting that history is repeating itself, there are certainly some interesting similarities between MiFID I and II. With its focus firmly on equity markets MiFID I saw a number of new ventures (Chi-X, BATS, Turquoise, Quote MTF, NYSE Arca Europe and others) line up to capture a share of the European markets. With MiFID II now encompassing derivatives markets too, the new competitors today include NASDAQ’s NLX, GMEX and the new venture planned by LSE. Interestingly, incumbent exchanges seem more active the second time around with LIFFE and EUREX implementing a wide range of new projects, where listing their competitors’ products is the smallest of the changes.

A major catalyst to competition back in 2007 was home market settlement – the ability to settle your equity trades at the home market Central Security Depository (CSD), regardless of the trading venue. This innovation allowed banks to keep the inventory of shares consolidated within one CSD, while trading across multiple venues. The importance of home market settlement cannot be underestimated; Spain didn’t adopt it for a long time and so kept fragmentation at bay. In MiFID II it’s all about open access. Once implemented, trading firms will be able to keep their margin within one CCP while trading related products across multiple venues.

MiFID I was initially passed in 2004, but it was not until 2008 that changes really took effect. Hopefully we won’t have to wait so long to see a significant number of derivative orders flowing to different venues following MiFID II. But past experience shows us that being a newcomer is tough and only the most innovative and agile survive. It also highlights that there’s no trading fragmentation without post-trade innovation. On thing’s for sure, even if competition takes longer to arrive than expected, when it does come it will turn markets on their head.

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