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EU directive Absolutely MAD

EU directive misses the mark

The unfortunately named Market Abuse Directive is living up to its acronym. This EU regulation seeks to set in place a common framework for preventing insider dealing, market manipulation and full disclosure of information to market participants. It implements all sorts of sensible things such as listing persons with access to inside information. Another rule requires researchers to declare possible conflicts of interest.

But the section of the regulations that governs market manipulation might well prove to be counter-productive.

One of the directive's rules is to limit, to 5% of the total deal size, how much underwriters can go short of a new issue in order to stabilize prices. The objective of this rule is to stop arrangers bringing new issues at too aggressive a price, but few interests are served by it. Innovative or risky deals will be far harder to manage because hedge funds and other opportunists will be better able to second-guess what underwriters' positions are.

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