4 Feb 2013

New report highlights European investor concerns over proposed MiFID transparency regime for fixed income

A significant proportion of European investors say 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, according to new research from the Association for Financial Markets in Europe. 

In AFME’s Investor Survey of Fixed Income Liquidity, 56% of investors polled said they believe the MiFID II pre-trade transparency regime will have a negative impact on market activity through:

  • a decline in trading volumes; 
  • a reduction in transaction size, compromising the execution of large orders;
  • an increase in the cost of trading; or 
  • a stop to trading altogether.    

The fixed income market continues its migration from voice to electronic trading, though more slowly than previously envisaged. More than one third (37%) of respondents said that electronic trading has increased over the past two years and 39% expect it to increase over the next 12 months. However, this growth is evolving from a low base: in 2012, 55% of investors conducted no more than 40% of their trades electronically.

The findings also show that the majority (63%) of investors believe a choice of both electronic and voice methods of trading is necessary in order to maintain optimal market liquidity. Compared to the large investors, a significant proportion of small investors¹ (23%) believe that voice is the only method of trading necessary to maintain optimal market liquidity.  

In addition, the three key reasons highlighted by investors for choosing to trade by voice include ‘to improve liquidity’ (52%), followed by the ‘size of the trade’ (51%) and ‘certainty of execution’ (44%). 

The Investor Survey of Fixed Income Liquidity findings will be discussed in more detail at AFME’s 8th Annual European Market Liquidity Conference, which takes place in London on 13 February 2013.

Christian Krohn, a managing director at the Association for Financial Markets in Europe commented:

“The survey findings send out a clear investor message for European policymakers, namely that many investors believe MiFID’s pre-trade transparency proposals² will have damaging effects on trading activity, especially with regard to large trades.  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.  

“The survey also demonstrates the need to maintain the choice of both voice and electronic as methods of execution, which is seen by fixed income investors as essential to maintain optimal market liquidity. 

“Proposals to force all over-the-counter voice trading to take place under MiFID’s proposed

transparency rules will remove this flexibility and will have unintended damaging effects on liquidity.”