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The shockwave from the financial crisis continues to grip world economies and regulators have been spurred into acting fast and decisively in order to avoid a repeat of the problems and tackle other risks that may threaten instability. Global economic collapse may have been averted but as time moves on the regulatory debate has intensified and broadened to include markets and instruments that were not directly associated with the root causes of the crisis.
In the European equity markets it was anticipated that the period immediately following November 2007, the implementation of MIFID, would be heavy with the burden of debate about whether the resultant changes in market structure had improved market efficiency promoted fair competition and were delivering benefits to end investors. This period of intense change has been unexpectedly overladen with debates of global significance as regulators strive to define and apply universal principles that should underpin and govern the activities of all financial markets.
The process by which decisions are arrived at concerning equity market structure has never been easy, complicated as it is by factions from all sides lobbying for what is in their own best interests, and by the fact that there remain many diverse political agendas that overlay the debate. Matters are further complicated by the proliferation of opinion and lack of hard facts on key topics, a prime example being the huge disparity in estimates of the amount of dark trading that are not being published by the major European investment banks. In the risk averse environment in which regulators have to operate perceptions are more susceptible to bias and distortion than might normally be the case, with the potential that hasty and misguided rules on an uninformed basis may be enacted.
There arises a concern that current debates about equity market structure are collectively deficient and distorted by virtue of a lack of facts, political pressures, factional lobbying, and a lack of understanding on the functioning of the microstructure of securities markets, There is much work to be done in order to understand properly the effects of MIFID, and whether it is deficient in its construct, implementation or both. In addition important new topics such as dark liquidity and high frequency trading are in danger of being thoroughly misunderstood and mis-judged. There is a risk that these developments could in the longer term lead to a deterioration in the quality of the European capital markets and have a commensurate impact on European economies if not seen in the proper context.