MiFID “Best execution” directive

[gle101]

EU MiFID (Markets in Financial Instruments Directive) will be implemented the first of November this year. The SB industry faces an extensive regulation procedure as a set of rules on how to deal with financial instruments is being formulated. It will affect clients, both old and new, in a major way, if the directive is implemented in the spirit of the EU legislators. There will be more protection for us traders, however, new clients will have to understand the risk involved in spread betting, and verify their experience before being accepted as such. The really good side of the MiFID directive, seen from the SB’s point of view is that it will open up the doors to the entire European market without any national boundaries.

Are we traders going to notice any real difference when the directive is implemented? How will it affect our daily trading? What kind of execution model will the SB companies adopt? So far the SB companies have gotten away with almost anything in order to secure their spread and increase profits. Are the “happy” days over for the SB’s and can we as traders, be assured the best possible deal? Some intriguing questions arise that are interesting to ventilate.

1. Will “Best execution” mean auto execution on the price they quote (no “locking in” or freezing) otherwise, either a “price no longer valid” or a re-quote?

2. Will it be in accordance with the “Best execution” directive, to put clients in different categories, depending on trading style, i.e. some enjoy auto execution, while others are on intervention by a dealer?

3. Will artificial slippage and “taking out” stops be a thing of the past?

4. In case a transaction is disputed, will the client get access to data that proves that he has gotten the best possible execution both time wise and price wise?

5. Are there any drawbacks for us traders when MiFID “Best execution” is implemented?

6. What will happen if the SB companies do not follow the MiFID “Best execution” directive and will FSA be powerful enough to ensure this?

 

[grantx]

Gle101,

If only they were as keen to clean up their own dubious practises and abuses.

If you have a client who is also an MEP, or who is in your backpocket, you can do what you like.

Then again, if clients weren't short-changed or sh?t on, there would be no need of regulation.

Grant (Doctor of Jurisprudence).

 

[lurkerlurker]

If what you say is correct, does this mean that we will be able to use SB companies with better tax treatment (ie they can afford to fully hedge all full lot positions) combined with equivalent protection from the FSA?

Further, does this mean that SB firms can't quote cash prices, weekly futures, etc any more?

I think best execution just means passing the correct price they would have received in the market on to the client - I think they will still be able to use dealer intervention and reject bets.

Further, has anyone else noticed that SB firms seem to have an issue with withdrawals above all else? Frequent or large withdrawals seem to annoy them, the frequency being more important than the size. Anyone care to shed some light on it? I would suggest that profitable SBers limit withdrawals to once per month (like a salary) or less, in order to avoid "special treatment".

gle101 -thanks for the thread- hopefully we can have some well informed commentary.

 

[gle101]

Sorry to be the bearer of bad news but I'd be extremely surprised if you notice anything at all changing as a result of Mifid. The simple fact is the directive is incredib;y vague, both in scope and in content, and as a result there simply isn't a consensus on how to interpret it in the markets even now.

So don't get your hopes up.

GJ

I don't know about this, but, of course, the MiFID directive will in the long run have a significant impact on the SB industry. But as you are saying, it won't probably happen over night, but eventually the SB companies will apply to the directives. The SB companies will have access to the whole EU market, so the pressure to perform according to the MiFID directive will increase. Regulations for this industry are on the way, no doubt about it.

 

[gle101]

If what you say is correct, does this mean that we will be able to use SB companies with better tax treatment (ie they can afford to fully hedge all full lot positions) combined with equivalent protection from the FSA?

Further, does this mean that SB firms can't quote cash prices, weekly futures, etc any more?

I think best execution just means passing the correct price they would have received in the market on to the client - I think they will still be able to use dealer intervention and reject bets.

Further, has anyone else noticed that SB firms seem to have an issue with withdrawals above all else? Frequent or large withdrawals seem to annoy them, the frequency being more important than the size. Anyone care to shed some light on it? I would suggest that profitable SBers limit withdrawals to once per month (like a salary) or less, in order to avoid "special treatment".

gle101 -thanks for the thread- hopefully we can have some well informed commentary.

This I don't really know, it might be a possibility on some products as the client base grows and if taxation becomes more beneficent for the SB company.

Yes according to MiFID the quoted price must follow a real underlying market asset. A virtual index or a combination of indices that make up a cash price is not allowed as I understand it.

Yes this is a tricky one, "Best execution" is a combination of "rules". By differentiating clients in order to limit the possibility of a best price, the SB company in question, does not in my eyes, follow the "Best execution" directive. Rejection of price will be ok, and re-quotes as well. Again it all depends on why and how the company implements these dealer options;

The duty of best execution
Article 21 requires firms to ‘take all reasonable steps to
obtain, when executing orders, the best possible result for
their clients, taking into account price, costs, speed,
likelihood of execution and settlement, size, nature’ or
any other relevant considerations.

 

[gle101]

Yes but you have to remember this is basically to do with firms acting as agent, not principal. Firms such as pension fund mamagers, entrusted with a fiduciary duty of care to excercise caution when applying client funds to the market are really what this directive is aimed at, NOT people betting their own dough with SB firms. Think people are missing the point a bit here when they talk about best execution.

GJ

It is not my point of view that spread betting firms when it comes to financial instruments (it doesn't apply to sports spread betting) are excluded from the MiFID "Best execution" directive. I have been looking at the FSA paper on the issue and it says as follows;

Changes to current FSA waivers and opt-out provisions

3.10 We have in the past created exclusions from best execution requirements for
certain spread betting firms. MiFID does not allow Member States to grant
exclusions from particular requirements. So, these firms will need to provide
best execution to their retail and professional clients. We understand that
retail clients are particularly active in this market, so MiFID presents
particular challenges. We discuss possible options below.

http://www.fsa.gov.uk/pubs/discussion/dp06_03.pdf

I would appreciate if you and others can take a look at the paper and give your viewpoint as to whether financial spread betting is really excluded from the MiFID "Best execution" directive.

 

[The Pear]

It is not my point of view that spread betting firms when it comes to financial instruments (it doesn't apply to sports spread betting) are excluded from the MiFID "Best execution" directive. I have been looking at the FSA paper on the issue and it says as follows;

There are thoughts that where an SB company contracts with a client as principal to principal the Best ex rule does not apply. where the company transacts an order (as opposed to a trade assuming one can differentiate against the two) on behalf of a client (agency business) the rule applies. The grey area exists when you correlate the underlying market against an OTC market and regulators (as well as some clients) see the two as the same when they are clearly not. In part this is the fault of the SB industry for marketing SB products as the equivalent of the underlying. SB firms are only working an order to mitigate risk but that order relates only to the bet not the underlying product (although a firm may tend to hedge with an analogous product).

 

[The Pear]

Good point well made, and herein lies the rub. Sure these firms are regulated by the FSA, but Im guessing lots of that regulation pertains to record keeping etc.

By the way - date on the document is May 06 - things can and do change greatly in this time. Just something to be aware of.

GJ

GJ - good spot thanks but the most recent FSA blurb really was not of any help either - talking about referencing and underlying product against a bet, but thats hard if you are trading the FTSE out of hours! There is more information with these companies than most other financial institutions provide and the products are generally great. The rgulatory bodies just cant handle 'caveat emptor' and innovation

 

[Lightning McQueen]

Trade and Order Execution Policy Effective 1 Nov 2007

Here's the finspreads response to MiFID, haven't read it myself yet, or the others relating to it, but thought I'd post it to see how you guys compare it to other SB outfits.

Lightning

 

[Lightning McQueen]

Thanks for that GJ, I've now had a quick skim through and as has been said already on this thread I have to agree so far that nothing appears to be really any different than before really. Having said that a little bit of transparency maybe outing itself thanks to MiFID, I like that.

Regarding the common complaint of dealer referral we may have in this paragraph maybe an answer, which differs from simons explanations on the CS thread. In fairness I don't recall Simon explaining it this way, he may have?

"There is a limit to the number of sequential trades that you can make: if you try to execute many small trades in the same market over a short period of time, then once the aggregate size across all such trades exceeds our size, the next requested trade will be referred to one of our dealers for review."

Also a small piece on trade refusals, I'm assuming here that each trade made will be time coded with a price of the instrument being traded also coded with the order to trade, maybe this explains why some get instant fills and others may wait and then get a trade refused, through no real fault of their own.

"To protect ourselves against internet communications delays or deliberate manipulation of our prices, all instructions are validated against our recent price history and will be rejected if this security checks fails."

I'm sure there are loads of little nuggets in these documents to learn the art of the spread bet and smooth the trading path with this form of trading.

Happy trails

Lightning

 

[The Pear]

I havent seen any other SB firms show there hand yet - is there other documentation out there? But like you said Lightning, not much seems to have changed....

 

[lurkerlurker]

CMC Markets have just emailed with their Execution Policy and amended Terms.
Dear Client,On 1st November 2007 the Markets in Financial Instruments Directives (MiFID) comes into effect and will result in changes to the conduct of certain regulated financial services business in Europe. One of the objectives of MiFID is the establishment of a harmonised set of European regulatory rules for investment services. CMC Markets' Terms of business are being amended to comply with the new MiFID requirements. In particular, we are including references to our new Execution Policy. In addition, we are also taking this opportunity to make a small number of other changes to the Terms of Business to reflect business developments. The new Terms of Business and Information about our Order Execution Policy come into effect from 1st November 2007 and replace our previous Terms of Business for investment business from that date.Terms of Business: http://www.cmcmarkets.co.uk/sb_tob.pdf Information about our Order Execution Policy: http://www.cmcmarkets.co.uk/execution.pdfWe would like to draw your attention to clause 13 of these new Terms as this refers to a key change in how we will do business with you. Please ensure you read all of the documents carefully as they form part of your contractual relationship with CMC Markets. Please note that by continuing to deal with us on or after 1st November 2007, you will be deemed to have read and agreed to our revised Terms of Business and our new Execution Policy.If you have any reason to contact us in relation to these materials, please do not hesitate to contact us on [email protected] or 020 7170 8200.CMC Spreadbet Plc is authorised & regulated by the Financial Services Authority


Could somebody explain in more detail clause 13 of the TOB? It appears that clients will now rank as general creditors, deposits in SB accounts will be used in the course of CMCs business, client monies will not be segregated, and client monies will not even be classed as such. Also, it appears they put your funds into money market accounts for their benefit even if your account does not qualify to pay interest.

 

[The Pear]

mifid gives with one and takes away with the other!!! I think CMC will be treading on thin ice. What they are doing is opting us out of client money protection which is the equivalent of categorising a client as the old (soon) intermediate, rather than private that gets full funds segregated. The FSA have indicated that this measure should be used only sparingly - ie if a client becomes an elective professional. I will put money on the fact that CMC will have to change their terms - its not really their fault as the regulatory rules seem to be blurring further but if they had any sense they would try to ensure greater protection for their clients not less.

 

[Lightning McQueen]

The finspreads email to me states.

"We have classified you as a Retail Client. This means that you will receive the highest available level of regulatory investor protection."

I'm pleased about that, nothing to worry me there for funds in the account, I haven't found any changes yet that would be a concern from my point of view, so far so good then.

Lightning

 

[Jack o'Clubs]

I noticed the CMC drop in protection when I got their MiFID email at the weekend. At least they had the decency to point out the change, although I would now be uneasy at leaving a large deposit with them - fortunately I don't really use them anymore. I got the IGIndex email this morning - I'll go through that and post up here later...

EDIT: IGIndex: "We will treat money received from you or held by us on your behalf in accordance
with the Client Money Rules."

 

[Splitlink]

The finspreads email to me states.

"We have classified you as a Retail Client. This means that you will receive the highest available level of regulatory investor protection."

I'm pleased about that, nothing to worry me there for funds in the account, I haven't found any changes yet that would be a concern from my point of view, so far so good then.

Lightning

Me, neither, but I'm not pressing the button 'til the last minute.

Split

 

[Lightning McQueen]

Me, neither, but I'm not pressing the button 'til the last minute.

Split

oops!, I pressed the button, no going back now

Lightning

 

[timm]

Terms of Business: http://www.cmcmarkets.co.uk/sb_tob.pdf
Order Execution Policy: http://www.cmcmarkets.co.uk/execution.pdf

Could somebody explain in more detail clause 13 of the TOB?

13.1 Money required to cover margin belongs to CMC.

13.2 The rest of the money is held in a client money bank account as per FSA client money rules (i.e. you are classified as retail client).

13.3 CMC will take money from your client account to cover margin whenever they want. CMC will put it back if it's no longer required to cover margin the following day.

13.4 After 6 years without contact with you, the money will no longer be treated as client money.

13.5 If the FSA lets them, CMC will use money market funds to store client money.

13.6 After six years of no contact, CMC will spend your money.

13.7 If you are in credit CMC may pay you a small amount of interest.

13.8 If you are in debit you will pay CMC a lot of interest.



I can also summarise the Order Execution policy:

CMC is the execution venue for all trades.

CMC manufactures the price for all instruments.

CMC decides what constitutes best execution and does not treat all clients the same.

 

[Splitlink]

As long as things aren't WORSE than they were before, I guess that I can live with any improvements.

Split

 

[gle101]

Trade and Order Execution Policy Effective 1 Nov 2007

Here's the finspreads response to MiFID, haven't read it myself yet, or the others relating to it, but thought I'd post it to see how you guys compare it to other SB outfits.

Lightning

Thank you for posting the Finspreads link for Trade and Order Execution Policy Effective 1 Nov 2007. I had a quick look at it and not much has changed really in their policy when it comes to "Best execution". The importance of the contents might not be visible at this stage, but the fact that SB companies acknowledge that there is a new set of rules to come in effect as of the 1 of November is worthy of consideration. What annoys me is that this kind of statement comes in direct conflict with the MiFID "Best execution" directive.

• There is a limit to the number of sequential trades that you can make: if you try to execute many small trades in the same market over a short period of time, then once the aggregate size across all such trades exceeds our size, the next requested trade will be referred to one of our dealers for review.

The same goes for Capitalspreads, Simon is using the term "overtrade". One wonders why the SB industry hasn't gone beyond the stage of infancy. There will for sure be some changes ahead as the competition increases and awareness grows among SB clients.