Since being introduced by the European Securities and Market Authority (ESMA) back in 2018, the MiFID II directive, which is short for the Markets in Financial Instruments Directive, has completely transformed the practice of trading financial instruments. It has widely been described as the most far-reaching piece of financial regulation introduced in Europe since the crash of 2008, one that has had a substantial impact on trading practice.

As with many other landmark pieces of EU legislation, MiFID II triggered what has been called the 'Brussels Effect', in which a piece of EU legislation aimed only at European sellers and consumers ends up being de facto adopted by much of the rest of the world.

This is because, although legislation like MiFID II only technically applies to entities with a physical presence in Europe, any entity wishing to compete for European clients has had to adapt, as those clients will expect the same levels of compliance and transparency as they are accustomed to from their European investment firms.

Of course, it's not just large firms that have had to comply with MiFID II, smaller online traders and brokers have had to get on board with the requirements if they wish to operate legally in Europe. A full two years on since MiFID II was rolled out, let's have a closer look at how the competitive landscape for digital brokers has changed.

Source: Unsplash

Comply or Die 

First off, it's worth noting that, as MiFID II has been allowed to mature over the past two years, the enforcement abilities and noncompliance penalties have grown stronger and larger. While the regulations are designed to ensure that investors are protected and that traders and brokers operate in the most transparent and fair way possible, they were also intended to bring the vast ocean of unregulated brokers into the formal trading regime.

To achieve this, penalties for noncompliance are harsh. Many of the headline-grabbing penalties have involved major firms such as Merrill Lynch, Deutsche Bank, RBS, and City Index Limited, who have received fines of between £2 million to £45 million as a result of breaching MiFID II rules on transparency and accurately reporting transaction. However, firms and brokers of all shapes and sizes have been affected.

Has MiFID II Brought Unregulated Brokers in From the Cold?

As mentioned, one of the key goals of MiFID II was to essentially make it impossible for unregulated 'dark' brokers to operate, both within Europe and beyond its borders. In some areas, there has been some success, with the market for unregulated stockbrokers, in particular, becoming hostile in the past two years, as more and more clients and investors seek out providers who are demonstrably MiFID II compliant.

However, this is not the case across the board. There is still a lively and active market for unregulated forex (foreign exchange) brokers across the world, as it is typically easier for currency trading to operate outside of the MiFID II's remit. That's why the most competitive brokers have gone above and beyond to demonstrate compliance to clients who are trying to avoid the potential shark's nest that is unregulated forex trading.

The most popular regulated forex brokers now make it clear on their website exactly how they are compliant with regulations such as MiFID II, as they know that this is a way of letting clients know they are trustworthy. While not all unregulated forex brokers are untrustworthy, many of the ones that have decided against compliance will find it more difficult to attract investors.

Source: Unsplash

Have Brokers become More Competitive? 

When discussing sweeping financial regulations such as MiFID II, it is easy to fall for the tired old claim that such regulations stifle innovation and competition. However, as ESMA made clear in the run-up to the implementation, the goal of MiFID II is to actually improve competition levels by preventing unfair, predatory pricing and monopolistic behaviour.

It is certainly true that the market for forex trading and small-scale online stock trading has absolutely skyrocketed since MiFID II was introduced, in terms of revenue, daily transaction volumes, and the total number of regulated brokers and traders.

The biggest and most widely used brokers in Europe are almost exclusively those that are regulated and compliant, which suggests that those that follow MiFID II enjoy a competitive advantage among clients and a larger market share than unregulated brokers. The overall market is certainly growing more competitive, just in a way that protects consumers and investors. 

MiFID II is a mammoth piece of legislation that runs to over 700 pages in length. Full compliance is naturally very demanding for smaller brokers, but the rewards of doing so are evident.