This issue of AT coincides with another attempt by Europe to
become a little bit more like America. No, not Tony Blair's hopes
of being elected President of Europe just in time to see Bill and
Hillary move back into the White House. Rather, that slightly
less foolhardy European Union initiative, MiFID (Markets in
Financial Instruments Directive), which aims - as one of the
pillars of a single European investment market - to allow
Europeans to shop around between rival trading venues to get the
best price for their favourite stocks and shares. Just as US
exchanges are already compelled by Reg NMS to re-route a trade if
a competing venue can offer a better price, traders in Europe
will soon be using automated trading tools to check out prices on
different trading venues and - in the blink of a millisecond -
choosing the best deal based on their 'best execution'
Because Europe must always do things slightly differently to the US, it is the investment banks and the asset managers that must ensure that the end-punter is getting the best deal (in reality, MiFID is really about consumer protection as much as increased competition). Whether you're an exchange or a broker, the margins on equity trading are permanently on the wane. Nevertheless, knowing that lots of tiny of commissions are considerably better than a dwindling trickle, brokers have been keen to show journalists just how they are going to guide clients through an expanding and bewildering array of would-be stock exchanges. Although there's barely room to slip a cigarette paper between the execution policies of rival brokers, such is their catch-all nature, the banks and brokers know that the more valued and high-volume of their buy-side clients will soon be probing the tiniest dip in performance. "Why on earth did you wait until six months after MiFID to connect to Chi-X?" When brokers are admitting to round trips of 8 milliseconds for the newcomer and 80 milliseconds for a certain US-European exchange group, the answer had better be good.
Whether or not it will turn out to be misleading, it's too early to say, but AT was very grateful for the glimpse of the future provided by the broker that attempted to test its smart-order routing technology in front of a gallery of journalists using live data. Of course it didn't really work the first three times, as the two (count' em) markets to which orders were being sent just wouldn't price competitively enough, but the broker's bravery paid off at last and we saw smart-order routing in action.
In truth, banks have got plenty of time to get things right as many buy-side firms are still emerging from the 'Millennium' approach to MiFID ("Look at all the money we spent on that and in the end we needn't have bothered because nothing happened"). Perhaps the most accurate glimpse of the impact of MiFID on Europe's investment sector was provided by a senior manager at a well-established UK broking, research and private wealth firm over lunch at a seminar on dark pools. "When I go back and tell them about this stuff, I draw a total blank. There's smart guys that joined a stockbroking graduate trainee scheme about 10 years ago and they're wondering how long we can call ourselves brokers if we can't afford the technology investment to execute trades ourselves."