MiFID II is here. It’s been a long time coming: in the past two years, I haven’t attended a meeting without the infamous acronym being mentioned. So far, it’s a bit of a damp squib – but this is mostly because the dark pool limits will now only come into effect in March. It’s only a matter of time.
As everyone in the industry knows, MiFID II is a far, far bigger deal than MiFID I. The effects of MiFID I were mainly restricted to the buy-side and electronic trading desks. MiFID II is all-encompassing. The clear winners are the consultants and the law firms, who have milked these regulations for all they’re worth. Compliance staff have also done well, although Credit Suisse’s recent promise to slash its numbers suggests the compliance party could be coming to an end at one bank at least.
The heaviest price for MiFID II will be paid by those of us working in sales trading, research sales, and research. With everything now having to be “valued” a lot of previously free things like “market colour” won’t be free any more. In the world of MiFID II, market colour will be classified as research and as such will have to be paid for. If you’re a salesperson this has huge implications: you can’t have a conversation with your client in which you offer an opinion about the market unless they pay you for it. And if they won’t pay you for it and you can’t offer an opinion, then what kind of salesperson are you?
As MiFID II takes hold, 2018 will therefore be the year of the “unsubscribe”. In much the same way as people have occasional purges of their emails to avoid receiving newsletters from any and every company they’ve interacted with, 2018 will be the year in which the buy-side will submit to a huge unsubscribe effort to cut costs. Greenwich Associates already suggest that European fund managers have cut external research budgets by 20% for 2018 and there are predictions that buy-side firms will prefer to deal only with a few market leaders when they trade.
This means consolidation. And it means job losses. This industry will need fewer people. Buy-side clients will be increasingly picky about what they pay for and the value it delivers – they will unsubscribe a lot. At the same time, it seems likely that buy-side traders will end up with more work than ever – especially if they can both execute trades and provide market colour to portfolio managers. In this sense, the buy-side trader could be about to become more important than before. Then again, they could simply find themselves deluged with admin work as they try assessing the actual value they’re getting from the research they pay for. Buy-side traders who aren’t up to these new tasks will be in trouble.
The real challenge though is clearly for the under-performing research analysts of this world. As everyone knows, their days are numbered.
And yet MiFID II’s very complexity may mean it doesn’t last long. The regulations are so complicated as to be unviable. As 2018 progresses and the real implications of MiFID II become apparent (getting rid of broker crossing networks iwill reduce liquidity, paying for research will erode buy-side profitability), it seems likely that we will revert to a souped-up version of MiFID I in the form of a MiFID III.
By 2021, I predict therefore that banks will be hiring research analysts again, that sales traders will be back to providing colour (and will therefore be needed in greater numbers) and that some features of crossing networks will be seen as a good thing. Compliance may never come back as those roles are replaced by artificial intelligence, but who’s complaining about that? In the meantime, there’s always the option of trading Bitcoin – which is far less regulated and becoming quite the thing.
Rowan Sidelsky is the pseudonym of an electronic trading salesman at a U.S. bank in London.
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