This article first appeared in the Paris newspaper La Tribune on February 9, 2010, and is translated and adapted here with permission of the authors. Paul Lagneau-Ymonet is a member of the Research Group Institution Building Across Borders at the MPIfG.
To date, the organization of securities markets has not yet benefited from the feigned attempts of reform presented by authorities since the outbreak of the current crisis. However, speculative opportunities like the risks incurred also depend on the markets on which one operates. It is for this reason that the coming revision of the European Markets in Financial Instruments Directive (MiFID), which came into effect on November 1st, 2007, is such a considerable challenge.
This Directive reflected an incredible faith in the coordinating virtues of the market – the central idea being that competition between exchanges and other trading venues would reduce transaction costs, increase trading volume and, as a result, lower the cost of capital for issuers. The MiFID notably abolished the ‘concentration rule’, which, in a number of countries (i.a. France), imposed intermediaries to carry out most of their transactions on a single regulated market, so as to concentrate the liquidity and to establish, for each security, a “fair price” known to all. Eventually, the directive has made possible the emergence of various opaque trading venues that challenge more transparent regulated markets.
Reports from the Committee of European Securities Regulators (CESR) and from the French Association of Financial Markets (AMAFI) reveal the extent of the disillusionment. The lower fees that resulted from unleashed competition have only benefited to a few internationally operating banks, namely about ten institutions that are responsible for three-quarters of the financial transactions in Europe. But the end clients – private individuals, in particular – do not fare as well.
Moreover, the rise in the number of trading platforms has fragmented the liquidity to the point of increasing the spreads (that is, the difference between affordable prices for the same security at the time of purchase and the time of sale), at least on regulated markets. This corresponds to an increase of the actual transaction costs and contributes to the rise of the volatility. Above all, the fragmentation of the liquidity has reinforced the uncertainty on transactions.
Only major market operators have been able to grant IT investments, which have proven essential for integrating information from various opaque trading venues. These investments have made internationally operating banks the only players capable to exploit the new asymmetry of information induced by fragmentation. Within the current architecture of financial markets, their profits constitute the structural equivalent of insider trading that we are aware of – and at times, sanction – at the company level.
The MiFID has thereby accentuated a trend at work since the development of the Euromarkets in the sixties: the affirmation of private and opaque markets at the expense of public and regulated ones. The dominant financial actors have every interest in deluding the public into believing that self-regulated markets are more effective. Yet, financial history has taught us that stricter market regulation is not contradictory to the growth of financial activities. In fact, a balance has long existed between, on one hand private markets where only major players conduct their business and, on the other, regulated markets treating the transactions of smaller investors as well as the operations of big players in search for additional liquidity.
Against the noxious competition of alternative systems of negotiation, we must strengthen the cardinal function of regulated markets, which are subjected to stricter supervision and tighter obligations of transparency. At the European level, the regulated markets should be entrusted with a general interest mission, the same task they have long observed on a national level: centralizing information on prices and transactions for listed securities. Failing to restore the centralization of orders, they should be entitled to centralize, consolidate and broadcast post as well as pre-trade information.
Such a revision of the European directive would then contribute not only to the reinforcement of the market transparency and to a better monitoring of transactions, but mainly contain the noxious trend towards privatized markets and information. This implies that governments detach themselves from the competitive ideology that primarily serves the interests of a few financial institutions and their professionals. Smaller investors, issuers of all size and the regulators themselves should, at least, defend financial information as public goods, through the proven virtues of truly regulated markets. They will never eliminate bubbles or crashes but they can make them less probable and less detrimental to real economies.
Authors: Pierre-Cyrille Hautcœur (École des hautes études en sciences sociales, École d’économie de Paris); Paul Lagneau-Ymonet (Université Paris-Dauphine); Angelo Riva (European Business School, IDHE Paris-Ouest-La Défense).