Opening Cross: Fixated on Fixed Income as MiFID Expands Reach

The European Commission last week released proposals for the second iteration of its Markets in Financial Instruments Directive, which shook up equities trading in Europe, prompted the creation of new  multilateral trading facilities, and caused trading to fragment, creating a wealth of new data and demands for a US-style consolidated tape to re-aggregate this fragmented data.

MiFID 2 includes a “mandated” tape—though one that allow vendors to offer their own competing tapes, rather than prescribing a single utility-style entity to administer a tape, in the way that the Consolidated Tape Association does in the US. However, while the CTA provides consolidated quote and trade data from fragmented US markets, any European tapes will provide trade data only. I still find it surprising that a regulatory body that has set pre-trade rules around trading across multiple venues and best execution would not also more strictly regulate the pre-trade data required to achieve its prescribed aims.

Not surprising, though, is that MiFID 2 will extend to asset classes beyond equities, and contribute to the forces driving bonds and derivatives onto exchanges or centrally-cleared, exchange-like platforms, such as European bond trading platform the Galaxy MTF, which recently received approval to operate as an exchange from the Swiss regulator. It’s also not surprising that more venues would want to trade fixed income assets: Third quarter turnover in Börse Berlin’s bonds trading segment increased by 183 percent over Q3 last year.

Participants in IMD’s Fixed Income report, which accompanies this issue, agree that more fixed income trading will move onto electronic platforms, and acknowledge that centrally-cleared platforms will reduce the risk associated with over-the-counter trading and increase trading and data volumes, but are not necessarily convinced that moving assets onto exchange platforms will automatically create more demand or better-quality data—especially if clearing costs make it prohibitive for firms to trade OTC assets and liquidity moves elsewhere.

However, such a move is expected to create more demand for market and historical data, which Celent senior analyst Anshuman Jaswal says has been one of the barriers to greater adoption of algorithmic trading in the fixed income markets, along with a lack of streaming prices, since most fixed income platforms use a request-for-quote model, rather than an order-driven marketplace—though Christine Sheeka, market data product manager at MTS, says the European bond trading platform is launching a platform for corporate bonds trading that will operate on a transparent, order-driven model.

And while transparency is the aim of MiFID, Lee Sanders, head of fixed income and money markets for London and Paris at AXA Investment Managers, says the most important factor for any trader is simply liquidity, followed by any information that gives an insight into economic activity to be able to take advantage of wider bid-offer spreads that usually manifest during periods of volatility. But while participants point to continuing economic uncertainty and market volatility, a recent report from ratings agency Moody’s says that default rates and negative ratings actions are expected to remain below the historical average over the next 12 months. Yet this is not creating the same sense of security that has historically been associated with fixed income markets. In fact, demand for data is rising as firms—still mindful of the credit crunch—try to better understand holdings, counterparties, liquidity positions and financings, says John Jay, senior analyst at Aite Group.

The question is whether these moves will make OTC markets more accessible, efficient and liquid, or just more commoditized, and drive traders to other, less standardized assets with higher returns but also higher risk, which may be the subject of MiFID 3.