By now, it is a well-known fact that MiFID will impact all investment operators in the European Union, but a new report from TowerGroup reports that broker-dealers on the sell-side will be hit particularly hard.
This is because MiFID makes it mandatory for a sell-side firm to publicly state its prices for equities traded on its own book, if the firm is a systematic internalizer.
TowerGroup believes that the typical broker-dealer classified as an internalizer will need to spend at least $22 million to comply with MiFID, with half of that spending on technologies including: algorithmic trading; workflow; business process outsourcing; market connectivity; FIX Protocol; service-oriented architectures; and data warehousing.
As a result, the costs of MiFID compliance could be extremely high. For example, systematic internalizers were initially defined as companies that traded more than 15% of their shares off their own account. This would have meant compliance costs of around $10 billion because there would have been at least 400 systematic internalizers in the European Union.
However, the European Commission announced on the 6th of September that they had dropped the 15% rule for internalizers. As a result, the compliance costs of MiFID for European securities firms have reduced significantly to a total spending of $1 billion (USD). Firms should also note that this drop in cost exposure is dependent upon a range of assumptions as to how the Directive will change between now and its final ratification in early 2006 by the European Parliament.