Who are the real beneficiaries of MIFID 2?

I’m sure there aren’t many industry peers who have managed to escape the MIFID 2 avalanche this past year and, perhaps only the frenzy surrounding crypto currencies, ICO and Bitcoin comes close to the boiling hot MIFID 2 topic in 2017.

For the better half of 2017, brokers and trading firms, falling under the reach of MIFID 2, were very busy implementing the parameters and protocol needed in order for them to comply with the new regulatory standards.

It remains unclear if this MIFID 2 dislocation has reached a wider audience, particularly FX traders, or if it has simply passed them by until now.  Very little has been said about who will actually benefit from these changes “downstream” and in what way.  In my opinion, while it still remains to be seen how the strict regulations will affect the various industry participants, one thing that seems certain is that the real beneficiaries of MIFID 2 will be the FX traders.

If I were to summarize MIFID 2 in a very short and simple statement, then it would be that

“MIFID 2 will bring fairness and full transparency to the financial industry, thus providing a more effective and attractive marketplace for the end users, the FX traders.”

If this is true, then many will rightly argue that it’s about time!

What rights, and what direct benefits do traders receive?

So, to get straight to the point, the MIFID2 dawn of transparency brings with it a demand for the complete disclosure of information and detail on every aspect of your trade; the price, the execution and the full breakdown of the transaction. Everything that may have been concealed or kept quiet until now, by many brokers, will finally be revealed.

To help you understand more, here are a few pointers on what FX traders are entitled to ask from their broker under the new MIFID 2 rules, effective January 3rd 2018.

• Best execution reports, including counterparty disclosure.

“Upon reasonable request from a client, investment firms shall provide its clients or potential clients with information about entities where the orders are transmitted or placed for execution.”

Summary: As a trader you will be able to demand a full leg execution report of your trade, with the complete disclosure of the counter party execution venue. You will clearly see if your trade was internalized (B-booked) or was went straight to the market for execution (full STP).

Full Price transparency, Mark-up disclosure and commission breakdowns

“shall send a notice to the client in a durable medium confirming execution of the order as soon as possible and no later than the first business day following execution or, where the confirmation is received by the investment firm from a third party, no later than the first business day following receipt of the confirmation from the third party. 

“a total sum of the commissions and expenses charged and, where the client so requests, an itemized breakdown including, where relevant, the amount of any mark-up or mark-down imposed, where the transaction was executed by an investment firm when dealing on own account, and the investment firm owes a duty of best execution to the client;

Where the client's counterparty was the investment firm itself or any person in the investment firm's group or another client of the investment firm, the fact that this was the case unless the order was executed through a trading system that facilitates anonymous trading.”

Summary: As a trader you are entitled to a FULLY detailed report about your placed trade upon request. This shall be delivered to you no later than 24 hours after the trade is placed and it shall include the exact price breakdown, whether it’s marked up or down, whether there is an Introducing Broker or Tied Agent fee add-on or other price addition as well as the precise execution price and execution venue.

Multiple leg transaction transparency and explanation of VWAP

“where the order is executed in tranches, the investment firm may supply the client with information about the price of each tranche or the average price.” 

Summary: If your order was executed with multiple fills, you may ask for a detailed explanation of the VWAP (volume weighted average price) of your trade execution.

The above examples clearly indicate that traders will now have access to much more relevant information when deciding on which Broker to trade. The transparency demanded by MIFID 2 will also show that there is a lot more to the advertised price than what first meets the eye.

2018 could very well be “the year of the awakening for the FX traders”.