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A race to nowhere ?
In 1820 , the economist Thomas Robert Malthus published his Principles of Political Economy . In it , he said “ If a country can only be rich by running a successful race for low wages , I should be disposed to say at once , perish such riches !” It is a comment that might just as well apply to the current debate over the declining commission rates paid to brokers in recent years . The buy side has repeatedly indicated that it is concerned that the falling rates could be contributing to a decline in the provision of high-quality services by the sell side , including high-touch services , specialisation and liquidity provision . Instead , these services are being replaced by algorithms and DMA – a process which is driving some asset managers to exasperation . A number of interesting developments in recent days point to a busy time of adjustment as autumn gets underway . Perhaps the most significant of these is the publication in September of a paper by French regulator the AMF on MiFID II – the first such paper by a national regulator . The European Commission ’ s magnum opus may have been in the works for more than six years , but it is only now that the final details are being put in place . Since MiFID II is a directive , it must still be transposed into national law by authorities in each of the 28 member states of the European Union . This could lead to local variations and differences ; the AMF ’ s paper offers a first glimpse of what the result may look like . Notably , the French regulator stated that brokers may well still be allowed to provide corporate access to clients free of charge ; this marks a departure from practice in the UK , where this is banned . Of course , ongoing uncertainty over the UK ’ s political divorce from the European Union continues to confound financial services firms around the globe . Article 50 of the EU ’ s Lisbon treaty has yet to be invoked by the UK government ; until this occurs , the UK is effectively stuck in limbo , caught between a majority vote in favour of Brexit and the legal reality of continued EU membership until a settlement is worked out . In the UK , the FCA is set to release a paper on inducements , which will itself likely be of significant interest to trading desks , although at time of going to press the document has not yet been released . This October also sees the anniversary of the “ Big Bang ” – the moment on 27 October 1986 , when the deregulation of financial markets in the UK came into effect on the London Stock Exchange via a number of significant changes . This involved the abolition of fixed commission charges and the change from open outcry to electronic-screen based trading , among other things . A fitting moment , then , to ponder the increasing electronification of capital markets and the shift to an ever more sophisticated market . In this month ’ s issue , Patrick Connors , head of outsourced trading operations at Weeden Prime Services , talks about the state of the US capital market , the struggle facing small caps and the impact of passive investing on the efficiency of capital allocation . This issue also focuses on the rising concern among asset managers about the role of ETFs and the global trend towards passive investing , which may bring new risks to the sound functioning of global capital markets . As always , there is also much to consider in the worlds of foreign exchange and fixed income . Notably , the Bank for International Settlements has been working on a global code of conduct which will impact FX markets ; the code is designed to restore trust in FX markets after the scandals of recent years . Among its measures , the code bans dealers from lying and starting false rumours . In the UK , the Bank of England has indicated it is in favour of the code , while the UK FCA ’ s handbook states that senior managers must ensure compliance with standards including relevant industry codes . The Senior Managers and Certification Regime also obliges senior managers to comply with industry codes of conduct ; BIS is due to release a final version of the code next year . We hope you enjoy this month ’ s issue and look forward to see you in December .
Elliott Holley Head of Global Buy-side Research eholley @ kandkgc . com
October 2016 www . buysideintel . com
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