MiFID II (Markets in Financial Instruments Directives II) is a law that comes into force today – and it’s going to radically transform the way assets are traded and how money is managed for investors.
For those that don’t have the time to read the 7,000-page document, here’s a quick summary of the new law– and why it could – inadvertently - make it harder for small and medium businesses (SMEs) to grow.
MiFID II is the EU ‘s second big initiative to regulate markets and to create new rules on how information is shared, prices are set, and how brokers pay one another.
The regulation serves a noble purpose – to democratise financial markets and to make it fairer and more stable.
The legislation is broad and far-reaching, and extends to any institution trading European securities - no matter where they are based in the world.
This regulation is a follow up to the first MiFID law, which came in 2007 and served to harmonise rules for stock trading. The financial crisis hit a year later and threatened the future outlook of the sector. Anxious policy makers worried about another financial meltdown, decided that more protection was needed to safeguard investors and to help create a more sustainable financial services model.
This concern led to the birth of MiFID II, which extends the harmonisation of rules beyond cash equity markets to include commodities, bonds and so much more. The law not only makes markets more transparent, but also regulates trading behaviour and lifts the curtain on the actual cost of trading and investing in stocks for those that are buying them.
At present, many securities are still traded in broker-to-broker deals, which is opaque and investors can’t determine whether they are getting the best deals. MiFID II will change this scenario while also ushering in a new era of open and regulated platforms. Automated trading currently makes up more than half of all trades and several major flash crashes have been blamed on these computer algorithms. To protect investors, the platforms must be registered with regulators and to include circuit breakers to shut them down.
It’s not just automated trading platforms that will be impacted by regulation. Research once provided for free by financial institutions, analysts and paid for by trading commissions will need to be paid for by fund managers and other third parties, to avoid conflict of interest.
This has sparked some concerns for SMEs, as MiFID II will indirectly impact the smaller end of the market as research could focus on the bigger sectors and companies. Brokers will probably avoid covering small-cap SMEs, impacting those firms’ ability to access investors. At the same time investors will be reluctant to invest into SMEs with low level of research available or reduced quality. Long term, this could undermine the ability for these businesses – the bread and butter of every economy- to scale and grow.
While MiFID II has been created with the best of intentions to stabilise the markets and offer greater protection for investors, more needs to be done to support the SMEs that could potentially be shut out from the benefits that MiFID II aims to create.