The EU is moving towards the most dramatic review of its financial markets in over a decade, aiming at more transparency and competitiveness.
Among other things, it is concerned with the introduction of artificial intelligence in trading, which is expected to have a major disruptive effect. AI systems are soon expected to make strategic portfolio decisions, as machines are seen as more capable in building and maintaining a systemic market overview.
The new regulatory package is the result of a seven-year-long negotiation resulting in the so-called European Union Markets in Financial Instruments Directive II (Mifid II) regulatory package, which spans over 1,4 million paragraphs.
The new regulatory package succeeds Mifid I, which came into force in November 2007. But, the transition to MIFID II will not be easy.
The new regulatory regime regulation has yet to be transposed to national law in nine of the 28-member states. The European Commissioner in charge of financial services, Valdis Dobrovskis, warns that the delay could trigger further disruptions for financial markets.
One of the objectives is to increase the transparency of financial markets, pushing all trading onto monitored electronic exchanges, marginalizing “over-the-counter” trading.
That should improve surveillance and the monitoring of trading.
New regulating envisions logging transactions to the 100th microsecond and reporting each transaction on the basis of 65 distinct parameters. Henceforth, clients will be able to demand from traders to prove they have chosen the best price in each transaction.
Moreover, research will be decoupled from trading. Portfolio managers will have to pay for research, which means that products cannot be “pushed” onto portfolio managers under the guise of “free” market reports.
The effect is global since it affects any asset listed anywhere in Europe, be it stock, bond, or derivative. The new regulation has triggered pessimism for (human) traders, with trade volumes in the Stoxx Europe 600 Index dropping by about 25% over the last month; the Euro Stoxx 50 Indexx has seen trading drop by more than 30%. The long-term effect is an open question.