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Trading Strategies That Work Despite New Regulations

Trading Strategies That Work Despite New Regulations

Traders who focus on the European markets needed to determine early in 2018 if they were going to alter their strategies based on new regulations.  In January of 2018 the MiFID was installed requiring brokers to alter their research and brokerage arms. The change was expected to reduce volume and liquidity in the European equity markets, and more than half way through 2018, the forecast of declining volumes was correct.  Trader’s who were able to generate income from highly liquid markets and specific types of research have altered their strategies and many changed the markets they traded.

The Introduction of MiFID

European regulated established MiFID II to create a higher level of transparency in the markets. To create an equal playing field regulator, establish a rule that required that investors would need to pay separately for research that was received from brokers and investment banks. A broker could no longer offer its services and use analysts in the investment banking arm of their company to drive revenue.  Retail traders were disadvantaged before the new MiFID regulations, and regulators believe that the new rules would level the playing field.

Volume and Liquidity

By removing an advantage regulator knew they would be dissolving some of the trading strategies used by institutional investors and funds. This would reduce liquidity in some European markets and drive large investors toward more liquid markets. The US, which already had higher volumes experienced an uptick in activity during the first half of 2018.  There has also been a shift toward mobile trading.

Trading Strategies That Have Changed

While brokers that sell research has seen an uptick in external revenues, revenues internally at many brokerage firms have collages.  Funds that purchased research have seen their costs double, making specific fundamental strategies less popular.  Statistical strategies have also been affected by the new regulations. The lack of liquidity in some markets has made high frequency trading less profitable. This strategy relies on markets with liquidity and high volumes, as algorithms take control and generate buy and sell strategies based on quick movements in the markets.  Additionally, strategies that scan the markets for new information and quickly generate buy and sell signals have found that the lack of liquidity has made these strategies difficult to execute.

Technical trading strategies have continued to function well.  The increase in volatility has provided a backdrop where prices whipsaw making rangebound markets a welcome place to trade. Trend followers have faced an uphill battle for specific markets. While the US has been a great place to trend follow, European markets have been a mess.

The new regulations have created a more equal playing field. Funds now have to pay more for specific types of research, increase the costs and reducing the profitability of certain fundamental strategies. Liquidity and volume in European equities has declined, pushing high frequency traders to equities in the United States.  While some strategies have changed over time these new regulations will bring confidence to European equity markets.

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