Before the January 3 implementation date of Mifid II, concerns were voiced from all corners of the capital markets that the new rules would be unduly expensive, hurt liquidity, and perhaps lead to market disruption.
As it turned out, those concerns did not materialise. Instead, the marketplace adapted.
We’ve witnessed signs of changed behaviour among market participants that follow other patterns when significant new regulations are implemented. Overall market volumes, fed in part by higher volatility, are up dramatically from the prior-year period. More fundamentally, market participants are demonstrating growing comfort with electronic trading.
While perhaps not the results many expected in the run-up to the Mifid II implementation, they should not come as a complete surprise. In many ways, market volumes in European fixed income and derivatives have so far followed a very similar path to that witnessed in the US following the arrival of Dodd-Frank.
For example, a year after new mandates for swap execution facilities (Sef) took effect, quarterly electronically traded volumes in US swaps rose more than 400 per cent and two years later were up more than 600 per cent.
Subsequent new trading technologies, greater access to data and analytics, and gains in efficiency throughout the trade execution process have resulted in net increases in market volumes.
The results in Europe to the arrival of Mifid are roughly comparable. On Tradeweb platforms, trading volumes in European credit derivatives are up 136 per cent so far this year, and up 72 per cent in equity derivatives. Likewise, volume in European government bonds is up 45 per cent in the same period.
Also of note, more than half of the euro and sterling-denominated derivatives traded volume on our platform so far this year was in instruments that were not subject to the Mifid II derivatives trading obligation. Average trade sizes in European bonds, rates and credit are up by around a fifth.
Aside from localised events such as the recent Italian political crisis, bid-offer spreads have not deviated from their long-term tightening trend.
There have also been other benefits for market participants from the shift to electronic trading. For one, it had the counterintuitive effect of reducing much of the compliance burden.
Requirements such as trade reporting, order record keeping and publication of reports on the quality of order execution are undertaken by trading venues - removing a great deal of cost and resources requirements for banks and asset managers.
To be certain, challenges remain. While Mifid II creates more pre- and post-trade transparency in fixed income markets, market participants are still parsing the available data and determining how to incorporate the additional information into decision-making.
Carefully sorting through such issues for the good of all market participants will be the central to unlocking the next steps in the ongoing evolution of fixed income and derivatives markets.
Overall, we see Mifid II as another major step in the electronification of trade execution and workflow in fixed income and derivatives. Over the coming years, this trend will continue with the increased use of automated execution, best execution analysis, and more intelligent use of pre- and post-trade data.
The fact is, change will continually present uncertainties. Whichever way the political tides shift and whichever new regulations are introduced in the future, the central challenge in financial markets will always be to unlock liquidity in highly regulated, ultra-competitive markets. Technology will play a fundamental role in making that happen.
Lee Olesky is co-founder and chief executive of Tradeweb Markets
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