At Cordium's London conference today, asset managers and others debated the far-reaching changes that the European Union's Markets in Financial Instruments Directive is going to bring to capital markets and 'price transparency,' concluding that the whole legislative exercise was going to be of limited value.

The panel consisted of John Frederick of Millennium Euro, Mark Croxon of Bloomberg, the firm that hosted the meeting, and Neil Robson, a partner at the City law firm of Katten Muchin Rosenman. Jonathan Wilson of Cordium was in the chair. They noted that MiFID II, in its final form, will call for the creation of new trading venues, transaction reporting and restrictions on high frequency trading activities. They wondered aloud whether the legislators in Brussels (and their rubber-stamp Parliament in Strasbourg) had bitten off more than the industry could chew.

The session began with the audience voting on the subject of 'best execution.' Delegates were asked whether they thought that MiFID II was going to provide investment managers with better execution opportunities (29.4% said yes); worse execution opportunities (17.2% opted for this) or just more well-intentioned regulations (an overwhelming 52.9% voted yes here). This fitted in with other votes that were taken throughout the day on MiFID II's usefulness or lack thereof.

The conversation soon turned to the failings of MiFID I, which one panellist (who was drawing comparisons between the technology of the time and the needs of today) said was 'tied down' in 2004. He thought that one type of firm that the current directive authorised - the systematic internaliser - was "the poor relative of MiFID I," adding that MiFID II was trying to make it work better. He went on: "Two key areas have worked. There is the regulated market, which is the core equities trading venue. This is not changing except for some tweaks, such as transparency. The same goes for the multilateral trading facility."

What of the new trading venues? The panellists looked at the OTF, the organised trading facility. One commented: "It's somewhere where multiple third-party buying and selling interests can interact, but this time round it is a discretionary type of market/trading venue. The investment firm can pick and choose whom it chooses to trade with – this is very different from what happens on the London Stock Market. This is to pick up the fixed income markets to make the structure of how these trades take place more rigid. So the markets become more flexible than the London Stock Exchange but you are going to have transaction reporting. When they were setting up MiFID I they expected it to regulate more trades than it actually did [and were sorry when it failed to do so]."

Over-the-counter derivatives trades are not being prohibited under MiFID II. One panellist elaborated: "The systematic internaliser is where it's going to happen. They thought that there would be hundreds of firms registering as systematic internalisers when they were preparing MiFID I. This time, ony 11 have registered with the European Securities and Markets Authority and seven are in London." A systematic internaliser is an investment firm that deals on its own account, excercising client orders outside a multilateral trading facility or MTF. According to article 4 of MiFID I, an MTF is a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments (in the system and in accordance with non-discretionary rules) in a way that results in a contract.

"They're not chaging the definition per se, barring the OTF, but they're pinning down thresholds so each firm will have to gauge whether it has met the thresholds quarterly. It's supposed to be bringing dark pool trading (which is increasing year by year!) into the light, i.e. onto 'lit venues.' Dark pools last year were 10% of the whole European market."

Who is likely to register as what? One panellist told Jonathan Wilson: "Principal brokers are more likely to be an OTF. They don't take the trade onto their own book normally, so they're not going to be a systematic internaliser. Proprietary traders are more likely to be caught by these rules. We'll probably see many of these firms registering as sytematic internalisers. Firms will have to get themselves authorised."

Another panellist thought that the costs involved would result in firms leaving markets: "Maybe some firms will not bother to draw their capital from the market any more. I think the cost of compliance – i.e. the cost to firms of monitoring all trading activity to make sure that they don't cross those two thresholds – might drive some smaller firms out. I think the big shots will stay. I don't think there will be a drop in liquidity in the market."

The audience answered another poll which announced: "MiFID II introduces greater pre- and post-trade transparency requirements for fixed-income markets. Do you conisder greater transparency to be a positive market development?" Those who agreed strongly accounted for 9.6% of the room. Those who merely agreed were almost in the majority, accounting for 46.2%. Those who neither agreed nor disagreed accounted for 23.1%. Those who disagreed accounted for more than a fifth - 21.2% . Nobody dared to say that he disagreed strongly.

On the subject of market liquidity again, another panellist said: "During the last 20 years, people have been saying to me that there's no transparency in the markets but I think there is! I think that the problem for the buy-side is that when they see pre-trade transparency they don't trust it. We talk about it as though it's one market but actually it's a market of markets. The biggest distinction is between wholesale and retail."

In another session, soon to be covered, the panellists asked more questions of the audience of asset managers, two-thirds of whom stated that they thought of the directive as 'gratuitous bureaucracy.'