More than half of investors polled by the Association for Financial Markets in Europe (AFME) believe that the MiFID II proposal to force all quotes in fixed income instruments to be firm and disclosed to the market will have a negative impact on trading activity and reduce liquidity.
In the groups Investor Survey of Fixed Income Liquidity, 56% of investors polled said the MiFID II pre-trade transparency regime would result in a decline in trading volumes, a reduction in transaction size, an increase in the cost of trading or a stop to trading altogether.
Additionally, respondents noted that the migration from voice to electronic trading is moving more slowly than expected. Thirty-seven percent believed electronic trading has increased over the past two years, and 39% expect it to increase further over the next 12 months. However, according to AFME, only 55% of investors said they conducted no more than 40% of their trades electronically.
Nearly two-thirds (63%) said, as a result, that offering investors a choice of electronic and voice methods of trading is necessary. Twenty-three percent of small investors said voice is the only method of trading necessary to maintain optimal market liquidity. Of the investors that choose to trade by voice, 52% said they opted for it to improve liquidity, 51% pointed to the size of the trade and 44% highlighted certainty of execution.
The survey findings send out a clear investor message for European policymakers, namely that many investors believe MiFIDs pre-trade transparency proposals will have damaging effects on trading activity, especially with regard to large trades, says Christian Krohn, a managing director at AFME. The European Council and Parliament amendments to limit MiFID requirements to trades below a certain size are to be welcomed. However, the council proposal to broaden the scope to illiquid instruments will still hamper trading activity.
Krohn says the proposals to force OTC voice trading to take place under MiFIDs proposed transparency rules will have unintended, damaging effects on liquidity.
(CG)