The industry needed his voice and his support to counter some key clauses in the notorious directive. Brown was seen as the one power broker with the authority to pull Germany behind British opposition and thus stymie MiFID. But he did not appear at the crucial meeting. The much less heavy-weight and persuasive Treasury secretary Paul Boateng attended the meeting and gave a prosaic speech that left Britain out in the cold. The result was a victory for the continental model, represented by France, Spain and Italy.

Boateng misunderstood the implications of MiFID, at least as far as leading City players perceive them. They say this EU Directive knocks a brick out of the foundation of the UK's market-driven, Anglo-American model of a securities market.

An analyst at a leading City investment bank commented: 'The UK was adamantly opposed to the Directive going forward because they felt that these transparency issues hadn’t been resolved. The Italian presidency wanted to push it through, arguing that if it hadn’t been completed before April 2004, all the accession states would have to get involved and it would get far too complicated. Also their interests wouldn’t be the same as those of the existing member states.'

He continued, 'in the end Germany was persuaded not to back the UK’s blocking minority vote. Gordon Brown was unable to attend the meeting, so Paul Boateng, the Treasury Secretary, argued the UK case, and he did it rather bluntly and undiplomatically in a way that seemed to annoy people. It ended up with this very politically unfortunate document, which did not reflect the major interests of the major industry which was in the UK, and the UK was fundamentally against it. It reflected the interests of the French, the Italians and the Spanish, who had this theoretical notion that to have pure price formation you need to see all the activity in the market and you need to have visibility of everything.'

From October 2003 hence, the UK has been left to fight a long and rearguard action against a directive which reflected Spanish, French and Italian financial interests rather than those of Europe's largest financial services industry. Large scale lobbying of the European Commission has had only mixed results, says the European Banking Federation (FBE). The Federation says proposed rules forcing banks to reveal to the market details of large equity positions are 'too complex, cumbersome and restrictive.'  The FBE has warned that 'investment firms which have entered into risk positions will be in danger of the market turning against them if they are unable to unwind their positions rapidly.' Wim Mijs, chairman of the FBE's financial markets committee, said, 'We are sailing into unknown territory. Industry and the EU institutions are trying to build a European capital market, but because some of the MiFID concepts are new, there may be mistakes that destroy value rather than help create a European capital market.' Sir Callum Macarthy, the chairman of the Financial Services Authority, added his heavyweight to opposition to MiFID in August 2005, when he said, 'It is already clear that the MiFID changes will impose significant costs on the UK market, including for example, through systems changes and IT upgrades. Industry is understandably concerned about the potential scale of these costs – and I share those worries. It is far from clear that the benefits to the UK will outweigh the costs.'

The risk that MiFID may explode in the industry's face is growing. For it represents nothing less than a fundamental overhaul of the seminal 1993 Investment Services Directive (ISD) which first introduced the key concept of the 'passporting' of financial services between European Union member states. Moreover, investment firms, exchanges, market information providers and technology vendors have only just woken up to the colossal task of implementing something which takes effect in April 2007.
 
The new directive is at the core of the Commission’s masterplan to establish a single liquid European market by 2010. It encompasses best execution, order execution, transparency, the accountability and integrity of financial systems, harmonisation among EU member states and protection of the investor. It also dovetails, and in some cases overlaps,  with other EU directives, notably those concerned with operational and credit risk. It takes the original ISD into new areas, including private wealth management, hedge funds, prime brokerage, insurance firms and investment advice. Some of the newer developments in the financial markets, including multiple trading facilities and liquidity calls and the use of over-the-counter derivatives are brought into European financial legislation, for the first time.

Numerous new pieces of jargon enter the financial lexicon with MiFID. Most significant is the use of the term ‘systematic internaliser’ to describe those large brokerages and investment banks which provide trading platforms for their own clients. These firms ‘concentrate’ their own liquidity, rather than serve as intermediaries for stock markets, to which all clients have access. The concept has been devised by Europe's proposers of MiFID who seek to democratise data by making it transparent to all investors. The assumption that the small investor or share dealer needs to see data on all trades, however large, before participating in a market is ingrained in MiFID although it is strongly disputed, if not totally fallacious.

Anthony Kirby, Accenture's director for financial services, explains the MiFID creed. ‘Investors should be able to purchase a financial asset traded on a member state’s market without additional impediment or delay when compared to a domestic market transaction.  Intermediaries should be able to transact freely with clients in other member states on the same terms as business is transacted in their home country. Issuers should be able to tap a deeper and more liquid market, in which spreads and transaction costs and the cost of capital should be reduced. Finally, infrastructure enablers should be able to make their facilities available to market participants and users throughout the EU. A lot of people will tell you that Mifid is like the Euro or Y2K, but in reality it is more like a fraction of one of those big-change efforts plus Big Bang, all rolled into one. Mifid could change the way firms inter-operate, particularly in the retail sector.’

MiFID adds multilateral trading facilities and liquidity pools to the ISD’s regulated markets, and where the ISD dealt with transferable securities, the new directive encompasses units of collective investment undertakings (UCITS)  and many other asset classes.

MiFID also does away with the ISD’s concentration rule, which required all share-trading in some parts of the EU to be conducted through a local regulated exchange. Investors can, at least in principle, shop around for all quotes on an exchange and compare them to those offered by a Multilateral Trading Facility (MTF) or a “systematic internaliser”. According to one broker, ‘The unanswered question is what then happens to spreads, liquidity, volumes and trade sizes. There are also implications for the data structures that firms will rely on to support the blizzard of data that will result from the directive.’

The data issue is compounded by the requirement for MTFs to publish firm quotes during trading hours in shares that they deal in that are quoted on a regulated exchange and, in effect, are acting as mini-stock exchanges. According to one market operator, ‘this will pose some significant data collection as well as best execution issues.’

The proliferation of pre-trade and execution information in the post-MiFID world demands a wholesale rethinking of data processing, says Chris Pickles, chairman of the MiFID joint working group. ‘Ensuring that you can provide best execution  will change the whole business of an investment firm. If there is no concentration rule, then there will be more competition and exchanges can no longer be assumed to provide the benchmark price, and so the on-exchange price is no guarantee of fulfilling best execution. But if there are more venues to look at, how do you monitor them all, in real time, all day, every day?’

Moreover, as the level of internalisation of trading rises, firms will have to monitor those internalised venues as well. Pickles, ‘Firms that are internalising are currently publishing quotes to their own limited client base. But MiFID requires that this information is made public across the whole market. The volume of data in the marketplace will bear some relation to the volume of quotes. Alongside the volume of trade information that has to be published, there is an even higher level of quote data that also has to go out.’

Article 27 of MiFID sets out three options for publishing data. They are, first, via the regulated market, then, via a third party and finally via a proprietary arrangement. ‘Regulated markets will work in exactly the same way as a market data vendor,’ says Pickles. 'Information publishing is a compliance requirement but can also be done on a reasonable commercial basis’. Pickles suggests a hierarchy may develop whereby quotes generated by big investment firms are more valuable than others. Issues also arise about the consolidation of data produced by numerous exchanges. One asked, ‘will it ultimately fall to a handful of data vendors to channel it. What will happen to the small data vendors?’

Pre-trade transparency for the MTF is covered in article 29 of MiFID but how that role overlaps with systematic internalisers is murky, says Pickles. ‘They will find themselves with a new role under MiFID, and will need to distribute information all across the EU, to the whole market. Post-trade transparency  for MTFs is covered by Article 28 and stipulates that information needs to be made available to the public for two weeks after publication. Pickles, 'Not only does  a lot of information have to be handled at that point, much more than is the case today. The systems are simply not in place to deal with that today. Although there are networks that cover the market, people are not collecting OTC  equity data and publishing it in any quantity. There are over 2000 investment firms that are members of stock exchanges within the EU, but there are not the boxes, the software, the network and the network capacity or the distribution capacity to get the data in, let alone out again.’

Pickles continued, 'We have less than two years left and given that I doubt this is in anyone’s budget for 2005 and probably not for the following year either, we will be left with three months to execute the largest project since Euro implementation.’

Sheila Nicoll, deputy chief executive of the Investment Management Association, stresses the magnitude of the operational changes required. 'All this tinkering is going to require systems changes. The systems changes are obviously going to have to start with our service providers, that is the brokers.  Investment managers are worried about the time scales necessary to make the appropriate changes. We can’t even start making appropriate changes to interface with whatever changes are required by the brokers until we know what the brokers are going to be doing. So we are very seriously worried about the timetable.

''We’re already thinking in terms of sending a note round to our members, saying "look, we can’t tell you what you’re going to be required to do, but certainly, for example, for budgeting purposes, you need to be aware that there will be changes required, and they will all have to be made by April 2007."

The challenge in terms of data management is two-fold. The sheer volume of data required from each firm will test many systems while the numbers of people who will need to be able to access it simply adds to the operational burden, says Pickles. ‘If individual firms try and solve it in their own way, we will just end up with an even worse problem. Information from one investment firm won’t get to other firms and the desired transparency won’t be generated.’

The creation of a central hub that could be the nexus for pre- and post-trade data would seem to be a logical step and a utility-type solution is indeed being contemplated by regulators. Market operators say a messaging hub should be created where firms can deposit their data and stipulate to which vendor it is supposed to go to comply with MiFID. That data could equally be shared more widely. The interchange of information will be stymied if vendors decide to run their own hub systems.

MiFID's scope has yet to be defined by the EU authorities, let alone by the securities firms and markets that must implement it. But there seems little doubt that data handling will be at the core some new technologies that will arise out of MiFID. According to one analyst, data warehousing which will allow firms to provide the deep base of mining analysis required for real-time reporting and regulatory input is critical. The second is business activity monitoring and workflow tools to allow firms to keep track of issues affecting the real-time execution environment. Investment firms will have to buy data from a variety of vendor suppliers to gain the most complete market overview as it is unlikely any single vendor will be able to provide the complete spectrum of information in a consolidated form.

One consultant who welcomes the introduction of the new directive says, 'MiFID presents the opportunity to establish new architectures which draw upon data management reaching into all the different databases. You would obviously wish to avoid a single point of failure, but new technology is not the impediment. Firms don't want to have to ditch their existing systems, so it will be a matter of throwing some management around their existing components. It needs to be evolution not revolution.’

He says the need for increased market price transparency will stimulate investment in electronic publishing technologies and produce a new boom in market pricing and information distribution. ‘New standards will be developed to enable investors to capture new data in a low-cost and accessible fashion. That said, the boom will be in the technology itself, rather than in the use of existing data vendors.’

The biggest winners from MiFID are likely to be global investment banks who become systematic internalisers, says Angela Knight, chairman of  the (Association of private client investment managers.  The smaller fry in the securities industry regard the directive as more overheads with little return. ‘Retail brokers will be forced to change at huge cost, both their front office dealing systems, and the back office, while dealing with no end of new practices and procedures.'

One such practice is the obligation on every European firm, no matter how small to deliver 'best execution'. None would object to the principle of delivering optimal service to the client, but the drafters of MiFID have struggled with universal definitions that cover the practices of every market, and every player. Clifford Dammers, head of regulatory policy at the International Capital Market Association, takes a jaundiuced view of the meaning of 'best execution.' He says, 'the real purpose is to make life so difficult for the big investment banks that they wouldn’t do much internalising of business. The ostensible purpose is to protect consumers. The fear is that the bank is going to come in and, without asking the customer,  automatically execute this order internally at a price that’s not the market price. That is the most contentious issue in MiFID and my executive committee was split on this argument.'

The object to execute orders on terms most favourable to the client remains a key element to MiFID's Article 21 which requires that member states ensure that investment firms take 'all reasonable steps’ to provide best execution, not only in terms of price, but also ‘cost, speed likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.’ Markets differ dramatically in their preparedness to the meet these conditions. ‘It’s fine for a market like the UK, but how do you apply that in Spain or Italy,’ says Kirby The key has to be to not get too prescriptive, but of course the big problem with MiFID is that it could be interpreted as a set of flexible principles by some markets and by others as prescriptive rules that must be followed.’

Certain markets may choose to interpret the meaning of 'best execution' locally at Lamfalussy Level 3, according to their own preference. Kirby says: ‘The solution is to view best execution as a process. Instead of trying to fit the best radar in the cab, you should get a sense of which client order flow is most appropriate. This is not just about measuring trading costs but about getting consistent definitions of market impact and opportunity cost at pan-EU level.’

No lesser authorities than The Securities and Exchange Commission (SEC), the Association for Investment Management and Research and the Financial Services Authority have set up working parties to examine the meaning and implementation of best practice without reaching a satisfactory conclusion. Anthony Kirby asks: ‘Should it be about best value or best cost? Should it be more expansive and cover the end-to-end transaction, taking in post-trade clearing and settlement considerations? There have been challenges to every definition due to the fragmented nature of markets.’

One investment banker concluded that firm's need to reach their own conclusions, implement them, and leave it up to the regulator to decide if they acted according to their own rules, once they are challenged. He said, 'Execution means that you have a policy, and we do have a policy, which looks at criteria including prices available on other exchanges, and you make sure you’ve got the best price. Historically you would have looked at the exchange and compared it with your price. But in the new post-MiFID world, you have to look all the places you have access to, including other exchanges, MTFs and other systematic internalisers. If you have access to numerous other places, the client will be bamboozled with irrelevant information.’

He continued, 'In the past we had a blanket best execution policy, which clients would expect us to do, and which would only be an issue if a client queried it. Now there’s a much more formal process which has to be communicated to the client. They can query the trade and refer to the policy.’

The requirement to inform the client of the best execution policy goes one step further than any previous practice. The firm must not merely post out the policy to the client and assume he understands it. They must also receive back a document signed by the client before fulfilling his trades. Firms find this so-called 'repapering' a burdensome prospect as previous experience teaches them that clients are notoriously cavalier about reading and signing lengthy and tedious legal documents. Securities firms, touched by MiFID, expect to have to hire an army of administrators to facilitate this process.

While the operational and systems teams at City banks seek to understand and implement MiFID, the lobbyists continue to oppose it root and branch. They recently had some Pyrrhic victory when Charles McCreevy, who replaced Fritz Bolkenstein as European Commissioner for Internal Markets and Services late last year, acknowledged that the Commission’s Financial Services Action Plan, has strained the industry’s compliance departments. With some understatement, McCreevy told delegates at a CESR Conference held in Paris last December, ‘I recognise there is some regulatory fatigue.’ He did not envisage adding to the securities markets' compliance burden in 2005. The industry blew him a raspberry, and expelled a universal sigh of relief.

The new directive, then known as ISD II, was renamed the Market in Financial Instruments Directive in 2004. It impacts on all asset classes with the exception of foreign exchange. MiFID currently contains 73 articles, more than twice the length of the existing ISD. But an enormous amount of technical data has yet to be added, and it could grow to four times its present size over time.