MiFID II

In the years since the 2008 financial crisis, stocks and bonds have bounced back. What hasn’t recovered is public trust. High-speed trading, bouts of unexplained volatility and scandals that exposed fiddling by bankers for their own profit have fed a sense that financial markets are unfair — or at least too complex for mere mortals to understand and overseers to monitor. Many politicians and regulators want to level the playing field, and see the mission as an unfinished piece of post-crisis cleanup. Nowhere is this more true than in Europe, where a vast set of new rules known as MiFID II will impose unprecedented transparency on traders and seek to curb conflicts of interest.

Banks and brokerages have been scrambling to prepare for the rules, which came into force Jan. 3. They are set to upend the way brokers share information, sniff out the best prices and pay one another. It’s the second attempt to regulate markets via an awkwardly named European Union initiative called the Markets in Financial Instruments Directive, or MiFID. Brokers will be driven to move transactions in a wide range of securities onto open, regulated platforms, limiting unreported broker-to-broker deals that have been the traditional way to trade things such as commodities, bonds and energy. Investors will no longer be able to pay for research by routing trading commissions to investment banks that employ their favorite analysts. To help protect markets from automated trading, which has swelled to more than half of the total, algorithms must be registered with regulators, tested and include “circuit breakers” that can shut them down. The new regulations have the potential to reach far beyond banks operating in London or Frankfurt to institutions trading European stocks or bonds anywhere in the world. Financial firms are frantically building data-reporting systems to deal with MiFID II, which consulting firms estimate will cost more than $2 billion to implement.