Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

Trade-Tech, Hong Kong, 22.03.11

The Markets in Financial Instruments Directive, since its introduction just over 3 years ago, has been a great success for investors in Europe. To a large degree it has achieved what it set out to do - it took away the concentration rule thereby eliminating the national exchange monopolies, introducing venue competition into the equity markets and also sought successfully to provide increased protection for investors. Transaction prices across the EU have decreased significantly and pan European trading of equities is now a reality.
 
 
However, now as we embark on the review of the directive, or MiFID II as it is now being referred to - we are facing a very different trading environment; some of it expected, much of it unintended due to the concurrent explosion in technologies being utilised by trading houses and the volatility experienced due to the financial and liquidity crisis.
 
 
Competition has led to 138 Multilateral Trading Facilities, or alternative trading venues to be established in Europe, in addition to the former national exchanges. Added to this there are numerous broader crossing networks that have been set up by individual broker dealers to internally match client orders as well.
 
 
While market fragmentation and increased investor choice for transaction venues was expected as a result of MiFID implementation it is not clear whether quite this level was envisioned. As a result of market maturity, every few months a new wave of expected mergers is announced as the market becomes increasingly efficient through consolidation, aiming to bring together liquidity and economies of scale, particularly in the field of technology.
 
 
Yet this can bring its own problems as well, as the larger market venues now merge and consolidate we must be careful we are not retreating from the original MiFID aims of free competition and investor choice, by possibly now creating even larger monopolies than the national exchanges used to be.
 
 
In all things, balance must be reached. I don't know what the 'right' number of trading venues is for Europe, but I hope that the market place will remain vibrant and diverse, serving the needs of all market participants.
 
 
One of the most important areas that MiFID II will address is the area of post trade data. While in the US there is a consolidated tape which allows investors to know whether they got the best possible price for their trade, this is not the case in the EU, and as stocks trade on any number of platforms at any one time, each charging a premium for sharing data about those trades, it is a serious flaw in the market and probably the greatest oversight in the original legislation.
 
 
 While MiFID aims to provide investors with best execution, giving brokers the responsibility to find the best price for their customers, without a consolidated tape there is very little an investor can do to prove he is or isn't getting the best price possible. Naturally it is much easier for brokers to go straight to their old national exchanges and claim this is best for the investor - without the ability to prove different the principle can only go so far.
 
 
The most controversial area of MiFID in the European Parliament, concerns the trading environment that has emerged in the OTC space and dark pools whether they be at exchanges or in private broker systems – this increased trading at dark venues is the opposite to market transparency.
 
 
The original MiFID laid out rules whereby pre- trade transparency requirements could be waived - predominantly to protect large orders from unnecessary market impact. It is the execution of large trades under these rules that have allowed the emergence of dark pools in Europe. Some of these are investor only MTFs, others are dark pools of liquidity on the exchanges themselves - and they are often confused with OTC trades and those done internally by brokers on their own broker crossing networks or systems, known in Europe as BCNs or BCSs.
 
 
The thing they share in common is their lack of pre trade transparency - yet as it stands BCNs operate within a loop hole in MiFID. While I would personally argue that block trade waivers and dark liquidity generally provide a valuable function for investors, there is currently less regulatory scrutiny of them, leaving them open to accusations of abuse. Some claim firm's prop desks operate inside these client dark pools, while others connect different broker crossing networks together- suggesting they are in fact operating as trading platforms instead of as a discretionary crossing system - meaning they should face the more vigorous regulatory regime of an MTF.
 
 
In Asia this concept is only beginning to be developed in the form of PTS proprietary trading systems, which in my mind seem to be a cross between a European MTF or American alternative trading system and a broker crossing network.
 
 
In the absence of a regulatory framework, as markets expand in Asia to take advantage of increased opportunities, it is difficult to ensure that the cards are not stacked against the investor. The most common accusation against MiFID is that it has only benefited the financial intermediaries and that real cost savings have not been passed on to investors - and that is even with the legislative mandate of providing best execution for clients. As the Asian markets evolve you must ensure that the real purpose of the market is remembered that of bringing long term investor capital to be utilised by companies for economic growth and reflected in the market structures.
 
 
The final area concerning equities that MiFID II is looking at is automated algorithmic and high frequency trading. Pan EU trading facilities have made strategies that were previously only profitable in the more liquid and diverse US markets more suited to being operated profitably in the EU. This, combined with new trading venues competing on speed times to attract more liquidity has led to unintended consequences that are still not clearly positive or negative. While more market participants have provided narrower spreads and increased liquidity, more and more large investors are complaining that they must splice their orders down to smaller and smaller chunks- naturally increasing overall execution costs. Investors and their brokers are now competing in an IT race with other financial participants to chase trades being conducted in milliseconds and less.
 
 
Clearly we cannot turn back the technology clock, even if we wanted to, while the European Commission has considered introducing minimum resting periods for orders, and order to cancellation ratio limits, the wider effects of such policies are unknown - and could prove more damaging to the market than the behaviour it attempts to correct. However, obvious legislative moves such as preventing unfiltered sponsored access, regulating firms which access market venues directly on their own account, and regulating co-location of servers are likely to be imposed shortly in order to ensure market integrity.
 
 
In my opinion the main thing lacking in the current HFT and algorithmic trading debate is solid data. Investors do not know what is happening to their orders but feel that their margins are being squeezed, their large orders are often being discovered by fishing algorithms pushing the market away from them during execution of larger orders. While HFT firms argue that they are simply following an age old arbitrage strategy, and that they have significant invested capital in the markets and play an important role now in providing liquidity to the market.
 
 
The reason neither has the evidence to prove or disprove their arguments is the lack of data and lack of supervisory oversight. I am not an advocate of overly intrusive regulation, but when following the May the 6th flash crash it took 4 months for the American supervisors to piece together 80% of the market and a further 2 months to put forward a theory of what went wrong, I am concerned.
 
 
And even more so in Europe where there are 27 different national supervisors all with very different powers and capacities - I am not convinced that the collective European supervisors could even reconstruct the same levels as the USA - luckily our markets were closed when the May 6th flash crash happened.
 
 
In Europe, we are now looking at the feasibility of implementing system wide, synchronized circuit breakers to stop the market when an abnormal event occurs, however I am still concerned that this will be a blunt instrument that doesn't go far enough to protect investors. It was not the financial intermediaries or the HFT firms who lost money when stocks were trading at a penny a share, they excited the market, but the retail and institutional investors who were unlucky enough to be trying to transact that day or had put limit orders into their brokers ahead of time to protect their downside.
 
 
I have called for European markets to consider the return to the system of market maker obligations, so that HFT liquidity providers would act as designated market makers in a certain number of stocks. If they truly are liquidity providers, benefiting from rebates for their actions, they should also take the responsibilities that go along with that - barring them from exciting the market completely when the going gets tough.
 
 
While Asian markets as yet do not provide the same scale as the EU and US markets it is clear that this is no longer the barrier it used to be. Technology that was created elsewhere is cheap to adapt for use in Singapore, Tokyo and Hong Kong - especially as the exchanges see the benefits of upgrading technology to increase speeds and working together in new ways such as that currently under discussion via ASEAN. There may not have been a flash crash event in Asia, but runaway algorithms have been reported and their use is certainly on the increase.
 
 
While this is no doubt beneficial for growth in Asia I would inject a word of caution, regulators are under pressure to relax rules and move with the times. Ensure that liquidity doesn't become a goal in and of itself, make certain that the needs of investors and the real economy are held paramount - the financial markets are there to serve the economy by providing a forum for investors to channel capital into businesses, not a profit making playground for financial intermediaries.
 
 
Market integrity needs to be ensured at all times for all players, which is why Europe is now looking to apply the same MiFID principles of transparency and investor protection to all other financial products including fixed income, FX and derivatives. Stress-testing of venues and the algos that access them is likely to become the norm as the search for liquidity becomes more time sensitive our market structures and reporting standards for regulatory oversight need to be robust. The G20 ambition that no market participant or product goes unregulated should be a solid starting point for a regulatory framework.
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04/12/2013

The European Commission has today designated European Protected Geographical Indication (PGI) status to the well-known Pembrokeshire Early Potato from West Wales.
 
The Pembrokeshire Early Potato was one of only three quality farm products whose applications for PGI status were approved today.
 
The EU PGI schemes protect product names against misuse and under these schemes more than 1200 products are already protected.
  
Commenting on this announcement from the European Commission today Dr Kay Swinburne MEP – who is from West Wales - said:
 
"I am delighted to see that this application to have "Pembrokeshire Earlies" added to the register of PGI products has been approved by the European Commission today."

"Achieving this prestigious status is a clear acknowledgment of the high-quality and distinctive produce we continue to deliver in Wales. Pembrokeshire Early Potatoes thoroughly deserve their place alongside the well-known food and drink products from right across the EU which already feature on the PGI register."

 
26/11/2013

Kay was delighted to host an event to celebrate Higher Education, Science and Innovation in Wales last night in the European Parliament.  The event builds on the British Council’s “Strategic Analysis of the Welsh Higher Education Sector, Distinctive Assets”.  A number of experts spoke to share their views of Welsh HE at the event and how it can develop in the future.
20/11/2013


In advance of the 'Fox-Hafner Report' vote on the single seat for the European Parliament, Kay and the other UK Conservative MEPs feel it is right to draw attention to the fact that the seven-year cost of the dual-seat arrangement comes to £928,000,000. Since her election to the European Parliament in 2009, Kay has strongly supported bringing the monthly Parliamentary meetings in Strasbourg to an end and therefore saving taxpayers a considerable sum of money.

20/11/2013


Kay was delighted to meet Malala Yousafzai, who was awarded the EU's Sakharov Human Rights Prize at the European Parliament today.
 

Following Malala’s speech to the European Parliament, Kay said, “What an inspirational speech Malala gave to the Members of the European Parliament today. As a mother of young children myself, I hope that they can also aspire to achieve like her. Malala is an exceptional young lady who has overcome adversity by tremendous force of character and a passionate belief in the right of everybody to enjoy and benefit from education.”   

12/11/2013



Kay was very pleased to meet with members of the Advanced Manufacturing Research Group at the European Parliament in Brussels, one of four groups set up in key Welsh research strengths to engage with EU research funds. The delegation visiting Brussels included representatives from Cardiff University, Bangor University, Swansea University and Trinity St.Davids University.

23/10/2013
In advance of tomorrow's European Council meeting of leaders, Dr Swinburne has echoed the recommendations made in a recent report published by a number of business leaders, which highlights the importance of removing barriers to business competitiveness in Europe and getting rid of burdensome legislation by cutting EU red tape.

 
Last year Dr Swinburne encouraged businesses in Wales to highlight to the European Commission which over-burdensome regulations they would like to see slashed, by writing to small businesses all over Wales and asking them to tell her their red-tape problems.
08/10/2013


Electronic cigarettes no longer face being taken off the shelves by the EU after Conservative MEPs were successful today in amending EU legislation on tobacco labelling.

Conservative MEP's led the amendment to defeat proposals that would have classified e-cigarettes as medicinal products, meaning they would have to undergo an overly burdensome and costly authorisation procedure, which would go beyond the procedures for traditional tobacco products... (Read more under 'Articles')

 


18/09/2013


Welsh Conservative MEP Kay Swinburne has been sitting down with leaders in Europe's biotech field to choose the top five candidates to compete in this year's EuropaBio Most Innovative EU Biotech SME Award.

As a member of this year's judging committee, Kay is once again supporting the EuropaBio award, which has attracted applications from all three sectors of biotechnology - healthcare, industrial and agricultural, from across the EU... (Read more under 'Articles')

11/09/2013


WELSH Conservative MEP Dr Kay Swinburne today hailed a vote in the European Parliament as a "wake-up call" in the battle to save Europe's endangered languages.

MEPs meeting in Strasbourg backed a report which calls on governments across the EU to develop action plans to encourage continued linguistic diversity.

The report, written by Corsican MEP François Alfonsi, also says governments should be "more attentive" to threats which may lead to languages becoming extinct.

Dr Swinburne, who was a shadow rapporteur for the report, has argued that Welsh can be seen as a positive example of language revitalisation which communities across the EU should follow... (Read more under 'Articles')

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Dr Kay Swinburne MEP
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Copse Walk
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CF23 8RB

Tel: 029 2054 0895
kayswinburnemep@welshconservatives.com

National Political Party: Conservative Party
European Group: European Conservatives and Reformists Group (ECR)

European Conservative and Conformist Group
© Copyright Kay Swinburne 2013 | All rights reserved. | Photographs of the Parliament supplied by Adam Issacs.
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