A comparative analysis of the US and EU retail banking markets - Wsbi

Best execution rules exist in both the US and the EU now,
obliging investment firms to execute transactions on the
conditions most favourable to their clients. However, neither
the Regulation NMS nor the MiFID defines precise
requirements that must be met to satisfy the obligation.
They both suggest a number of indicators that should be
taken into account while determining what best execution is
(such as price, cost, speed, likelihood of execution, etc.), but
the final decision is left to investment firms. Both in the US
and in the EU investment firms are obliged to define their
execution policy and present it to investors at the beginning
of their business relationship.
As an extension of the best execution rule, the US legislation
obliges trading centres to publish monthly statistics that
include uniform measures of order execution quality.
Investment firms must also disclose quarterly statistics on
where the orders were routed. The European legislation
does not require such consolidated statistical reports (with
the exception of systematic internalisers which make use of
a post-trade transparency waiver that allows them not to
disclose their identity when publishing the data in a real time
and as a result they will most likely be obliged to publish a
quarterly summary of the volumes they traded).
The national best bid and offer (NBBO) connects the markets
in a way that it requires information on best quotations
throughout the day to be continuously gathered and
disseminated to the public, so that investors always know
the best prices for NMS stocks and are able to compare
them against the prices at which their orders were executed.
Neither the MiFID nor any other EU legislation requires that
best quotes be gathered and disseminated.
Pre-trade rules in the MiFID require systematic internalisers
to publish their quotes in those shares admitted to trading
on a regulated market for which they are systematic
internalisers and for which there is a liquid market.
Regulated markets and MTFs are also covered by a pre-trade
transparency requirement. Pre-trade transparency also exists
in the US legislation. Namely, the quote rule requires OTC
market makers to publish firm quotations for any listed
security when these market participants represent more
than 1% of the aggregate trading volume for that security.
Europe is also getting new post-trade transparency rules, as
the MIFID obliges all three types of markets (regulated
markets, MTF and all investment firms) to make public the
volume and price of executed transactions and the time at
which they were concluded. The US recently introduced
post-trade transparency rules for corporate bonds, although
no evidence of post-trade requirements was found in relation
to equity securities.
The changes in the regulatory framework in both the EU
and the US have facilitated the linkage of traditionally
segregated markets in recent years. An increased number of
securities listed on one market started to be traded on
others, causing stock exchanges to significantly widen the
basis of their operations.
In order to better respond to the challenge of facilitating
increased trading and to widen their market access, stock
exchanges became interested in mergers/takeovers, both
between organisations that provide similar services and
between organisations that deal with different activities in
the securities transaction process. Nevertheless, one has to
note that such mergers and takeovers have so far been
carried out within the EU or within the US, whereas
transatlantic mergers have not yet been that numerous,
although showing good signs of a future increase.
It is acknowledged that the US as well as the European
Member States have highly competitive domestic capital
markets, but enhanced convergence of the two legal systems
is expected to contribute to even further opportunities for all
market participants. A study predicted that full transatlantic
financial market integration may lead to a reduction in costs
of equity capital by almost 9%, which would be a result of
a reduction in transaction costs by 60% and an increase in
trading volume by almost 50% 234 .
The dialogues between the European Commission and the
US Securities Exchange Commission have highlighted the
fact that both the US and the EU share the same vision
of sound financial markets, though the ways of achieving
it often differ. The underlying objective however is not
to create one set of rules for the two jurisdictions; instead
the challenge is to converge some of the regulatory
practices, avoid frictions and identify similarities which could
finally increase cooperation and possibly lead to mutual
recognition in certain areas.
234 “Transatlantic financial market integration: Ambition needed”, Deutsche Bank Research, 29 November 2005.
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