“Investing not betting” – Finance Watch
Finance Watch, the Brussels-based public interest advocacy group of which UNI Europa is a founding member, has published a position paper “Investing not betting” on MiFID 2.
The position paper deals in a comprehensive and understandable way with MiFID 2, the EU’s revised Markets in Financial Instruments Directive.
UNI Europa Finance and its affiliates have been focusing on the Directive’s revision as well, stating clearly that employees in the financial industry must – especially after the experience of the financial crisis – be protected from sales pressure. Finance employees must be empowered through adequate and sufficient training to give proper advice to customers. MiFID 2 offers an opportunity to lay these trade union principles down in European legislation.
The position paper “Investing not betting” calls on the EU to maintain a tough stance on:
• high frequency trading, which damages traditional investors’ trust in markets, drains useful liquidity and increases the potential for market abuse;
• commodity derivatives speculation, which inflates commodity prices and degrades the futures markets for genuine hedgers;
• over-the-counter and dark trading, whose growth (partly as a refuge from HFT) damages price formation and market fairness; and
• investor and employee protection, which are undermined by inducements and adverse sales incentives.
It also calls for the EU to drop the proposed “OTF” trading venue category, which risks opening the door to regulatory arbitrage.
The paper’s author, Benoît Lallemand, said: ”Financial markets play an essential role in supporting our economy. We welcome the MiFID 2 proposals for increased transparency and supervisory powers and for measures to discourage harmful trading practices. After the European Parliament’s current work, the spotlight will shift to the Council to take these proposals forward.”
In a series of detailed case studies, “Investing not betting” exposes the practices behind high frequency trading, commodity index investing and dark trading, to explain how these practices are detrimental to the functioning of financial markets and their contribution to the real economy. It debunks a number of commonly held beliefs, arguing that:
(i) trading venue competition has not benefitted the economy,
(ii) HFT does not create liquidity,
(iii) commodity index funds are not investment products and
(iv) disclosure of sales incentives is not enough to resolve conflicts of interest.
It presents recent academic research linking commodity speculation to food riots and social unrest around the world, demonstrating the impact of HFT on commodity derivatives and equity market correlations, looking at the history of stock exchange demutualization, and at the effectiveness of financial markets over time.
Thierry Philipponnat, Secretary General of Finance Watch, said: “We forgot that the primary objective of financial markets is to channel savings and capital to the most promising economic developments. Deregulation of equity, bonds and derivatives markets has undermined this goal and we now face an urgent need to re-direct capital from short-term, speculative use to long-term investment in the productive economy. For some participants, this shift is going to hurt but it is a challenge society needs to face.”