IMD: Since MiFID's launch in Nov-ember 2007, what impact has it had on the cost and quality of European equity market data?
Bob Fuller, director, Fixnetix: Due to significant fragmentation, both pre- and post-trade data has become more expensive and less reliable. This is especially true of the most liquid stocks, which are traded on many different trading venues.
Jarod Hillman, head of real-time data, London Stock Exchange: There is little doubt that the primary (and unintentional) effect of the MiFID regulation has been the lack of quality and timely reporting of over-the-counter data across EU member states. Widespread industry concern has identified the key issues to be a lack of granularity and reporting consistency, coupled with problems around duplicate reporting across disparate venues. These factors have impeded the effective overall consolidation of post-trade content by commercial aggregators and service providers. We believe the primary challenge for the European Commission in its MiFID review is to remedy this situation and increase market transparency.
PJ Di Giammarino, founder and chief executive, JWG: The cost of a full set of equity market data has undoubtedly risen, as there are now many more venues to capture data from. However, with increased competition, many market participants may have found that if they only require selected sources, they can narrow the amount of data consumed, and their costs may have fallen. This has focused firms' trading strategies and forced data vendors to offer more customizable products, increasing efficiency.
Andrew Allwright, business manager of MiFID Solutions, Thomson Reuters: There are now a plethora of trading or reporting venues that publish equities data in response to the opportunities and obligations of the original directive. But a lack of detail in post-trade publication requirements led to issues with the quality of data, over-reporting and insufficient granularity to allow users to identify the trading activity they wish to include or exclude from their view of the data.
Marcus Schüler, managing director for regulatory affairs, Markit: Given the lack of uniform standards around formatting and quality of data, transparency in European equity markets has suffered. Also, as many venues did not fully adjust their data fees to reflect their evolving market share, the total cost that market participants pay for equity data has increased.
IMD: What should the European Commission do to improve the quality of European equity data?
Marc Berthoud, deputy head of Data & Index Products, SIX Swiss Exchange: ‘Lit' data from RMs and MTFs is a non-issue. The quality is good and the consolidation is quite straightforward, as some vendors do offer such consolidated order book products already. The Approved Publication Arrangements (APA) regime proposed by the Committee of European Securities Regulators to the EC seems the appropriate answer for improving the quality of OTC data.
Christiane Baumgarten, head of product development, Deutsche Börse Market Data & Analytics: Regulated equity markets provide high-quality market data in terms of reliability and low latency. OTC data, however, is unreliable due to double or non-reporting, limited quality checks and lenient compliance checks. In order to improve OTC data quality, three steps have to be taken: clear and unified reporting rules on a pan-European level, introduction of the Approved Publication Arrangements (APA) Regime-including standards-as well as adequate compliance checks of OTC transparency.
Hillman: The key measure will be the effective implementation of quality standards around the CESR-proposed APAs. Provided this initiative is introduced as an enforceable regime, requiring investment firms across all member states to only publish their trade reports through APAs, we believe it could achieve the core framework required to facilitate the effective consolidation of post-trade data. We have also strongly advocated that venues should be encouraged to comply with an industry practice of selling real-time post-trade data separately from pre-trade data. We believe this will make post-trade data more affordable, and lead to an increased choice of cost-effective consolidated data solutions from the 200-plus commercial aggregators operating across the EU.
Di Giammarino: Improving data quality in the future will likely require a combination of new standards for market data and the right incentives for market participants to adhere to them. The APA regime proposed by CESR aims to solve the first of these problems, but not necessarily the latter-the business case for firms to register as an APA is unclear. I think the major market data generators will ultimately make or break whatever solution is in place, so it is important to have them on the side of the EC.
Fuller: Enforcing data standards and mandating fee caps for data being consolidated would significantly aid in the process. However, given the move of exchanges to rely more on non-execution-related revenue due to competition on trading fees from the MTFs, this may not be sufficient on its own. Note that because the same equity can be cleared by multiple clearers with different costs (unlike the US) the best price is not necessarily the best end result.
Allwright: The measures identified in CESR's Technical Advice on Equities Markets should go a long way to address these problems provided they are properly implemented and enforced. But in our opinion, a centralized consolidated tape is not a solution to this problem.
IMD: What would be the key advantages and disadvantages of introducing a utility-style consolidated tape in Europe? Could the same goals be achieved by adopting data standards?
Di Giam-marino: The potential for a consolidated tape to provide an industry benchmark against which to measure best execution and calculate analytics such as VWAP and TWAP could prove invaluable to the buy side. It may also hold value for regulators, who currently have a difficult time measuring market performance. While data standards could facilitate consolidation and improve the quality of data, they will not in themselves have the same benefits. However, the advantages must be weighed against the costs of the solution, both to set up and to run, which will likely be passed back to the end consumer.
Fuller: There are significant hurdles to be overcome in producing a utility-style consolidated tape, not least of which is defining the users of such a tape. If users are computer systems, where millisecond latency matters, then a consolidated tape of German equities created in London will be different than one created in Frankfurt, so would there be one consolidated tape or many? Common data standards and regulation of data pricing would allow the creation of various consolidated tapes for various types of users.
Allwright: It is not clear what specific problems or practical application there would be for a centralized, standardized consolidated tape. Our view is that real-time data users will want much more flexibility to reflect specific venues or trade types in a consolidated view, rather than a one-size-fits-all solution. The issue is less about whether a utility should be the vehicle for delivering it, and more about whether there is a real demand for it. The important thing is to establish standards that any provider could apply when creating a historical tape of record.
Hillman: We do not believe that the development of a Mandated Consolidated Tape plan, built and/or administered by the Commission would be an effective, or useful, additional solution for the market, investors or regulators. In our view, a mandated tape risks being an expensive, unwieldy and irrelevant project that will be overtaken by industry innovation and services that consistently evolve to meet the changing needs of investors and market participants.
Baumgarten: The introduction of a utility-style tape would likely result in unintended negative consequences such as a race to the bottom in terms of data quality, gaming for tape revenues, introduction of additional latencies and the creation of a single point of failure.
Berthoud: The real issue is the quality of OTC data. It is a misconception to believe that a Mandated Consolidated Tape would suddenly, by some form of magic, collect complete and consistent OTC data. We also recommend considering the consolidated tape operated in the US. This has promoted an unhealthy business model by encouraging some operators to adopt "payment for order flow" practices to increase their share of tape revenues, discouraged innovation in information products and caused market structure issues by supporting technical latency arbitrage strategies.
Schüler: Mandating a consolidated tape will not by itself solve any of the underlying issues. The adoption of data standards and the reduction in the cost of post-trade data are pre-conditions for successful and affordable data consolidation regardless of how the actual consolidation is achieved.
IMD: Do you see any practical impediments-such as technical, political or commercial barriers-to the formation of such an initiative?
Di Giammarino: The barriers to a consolidated tape are numerous. Where should it be based? Those furthest away will have the greatest latency, which could be a problem. How will it be paid for? If data providers are mandated to supply the tape with data, how will the revenue be distributed back to contributors-as a flat rate/by volume/by liquidity? Also, if one provider has higher data quality than another, how will they be rewarded? Finally, how will cancelled trades be dealt with? These questions are as yet unanswered, and will remain so without greater collaboration between the many market participants.
Berthoud: A Mandated Consolidated Tape would impose a one-size-fits-all solution, with no competition dimension, and a management driven by rigid regulatory requirements, irrespective of the economic costs generated. Requiring all data sources to comply with MCT technical requirements would impose additional costs in migrating to new technology. We expect such a solution would not be a leading technological one, so there might also be some concern over latency. Again, we believe it would be an infrastructure that is duplicative in nature.
Schüler: We are confident that the industry can deliver the desired European consolidated tape in a timely and efficient fashion. To ensure the viability of such an initiative, competent authorities and the EC should continue to focus on tackling the underlying quality and cost related aspects of post-trade data. They should also create a clear roadmap for all stakeholders that defines deliverables, responsibilities, and a fallback solution.
Allwright: The industry can deliver solutions where there is clearly a need or demand. It is not clear how a centralized tape would actually be funded if consumers do not have a need for it. One potential requirement that has been mentioned is for a standardized "tape of record" that could be used in validating trade executions. But in the absence of clearer regulatory obligations that would direct users to refer to this, firms will want a tape that includes the venues in their execution policies, not the market as a whole.
IMD: If the EC ultimately mandates a consolidated tape, what type of organization would be best placed to manage such an initiative?
Schüler: As vendors already provide consolidation solutions, the natural choice would be for a commercial provider to operate a consolidated tape. A utility-style operation run by a European authority might not be the best approach from a cost, efficiency, and timeliness perspective.
Fuller: No single commercial organization should be given the task unless it is put out to tender with a strict cap on revenues created, while a public body would likely take some time to set up.
Di Giammarino: If one seeks the best possible solution, it seems unlikely that regulators have the technical firepower to compete with the myriad exchanges and data providers that deal with market data on a daily basis. An industry-led solution would in theory yield the best result, but clearly it would be dependent on the business proposition. Thus far, the industry has voted with its feet, and it would appear that it's not worth the bother. So with great power comes great responsibility: if regulators are truly intent on creating a consolidated tape, they will have to set one up themselves or partner with the data supply chain and make it happen.
IMD: Do you foresee any challenges with increasing transparency for equity-like instruments such as exchange-traded funds, depository receipts and certificates?
Fuller: There really should not be, but a greater percentage of trading in these takes place in the OTC world where the availability of real-time data is by no means universal. This may have to be addressed in order for reliable pre- and post-trade data to be made available.
Schüler: In fact, a growing number of market makers in ETFs and some other equity-like instruments are already reporting their trades through Markit Boat on a voluntary basis to promote transparency in these market segments. Markit Boat has reported an average quarterly turnover of Ä500 million or 8,000 trades in ETFs over the last couple of years, in addition to an average turnover of Ä60 million or 500 trades in ETCs over the past year.
IMD: Would increased transparency requirements for OTC markets improve investor protection and/or price discovery?
Fuller: In those markets subject to current transparency provisions such as equities, yes. In others, such as the derivatives market, the lack of standardized products make the provision of any consolidated data not worth a lot.
Schüler: Transparency in financial markets will generally have a beneficial impact on the efficiency of the price discovery process and best execution, as well as on investor protection.
Baumgarten: The recent financial crisis revealed that the opacity of OTC markets played an important role in causing the crisis. A lack of transparency in the credit derivatives market resulted in firms being unable to identify their exact positions when OTC contracts, such as credit default swaps, were being unwound during the financial crisis.
Di Giammarino: In some ways, the question is a red herring: the G20 drive for greater OTC transparency is primarily aimed at monitoring and reducing systemic risk rather than increasing individual investor protection or enhancing market efficiency. Many firms seem happy with current levels of pre-trade transparency in the OTC markets.
IMD: Could more stringent OTC market transparency requirements result in unintended consequences, such as reduced liquidity?
Di Giammarino: The short answer is "yes, undoubtedly." Looking at the post-trade transparency regime being proposed for bonds, there is a great deal of debate over which instruments the regime should apply to and how soon after a trade information should be published-the Association for Financial Markets in Europe suggests "up to 12 days," while the Federation of European Securities Exchanges wants "real time." Equally, how liquid should an instrument be for transparency requirements to apply? According to AFME, CESR underestimated the number of bonds with a full prospectus by around 100,000. The range of suggestions on such topics is indicative of how little understanding of the impact the industry has. The same situation will hold for all OTC markets.
Baumgarten: OTC market players have expressed this concern for years, particularly in relation to the bond markets. But the Italian bond market-which is subject to MiFID pre- and post-trade transparency regimes for all venues including RMs, MTFs and OTC-has demonstrated that transparency has not resulted in withdrawal of liquidity. The market did not dry out, but is very liquid and traded actively. Certainly, the transparency regime for non-equities needs to take into account potential negative consequences in terms of market impact. However, this can be duly considered for large trades by exemptions from pre-trade transparency and deferred post-trade transparency obligations.
Schüler: We must bear in mind that the OTC markets are characterized by a small number of participants, an infinite number of product variations, a large average trade size, and low trade frequency. All these factors will make it challenging to create a transparency regime for these products while avoiding unintended consequences. MiFID's transparency regime for European equities recognizes that even for products as liquid as shares, a liquidity-calibration of the transparency regime is needed to prevent any unintended consequences. Given their characteristics, a careful liquidity calibration is even more important for the non-equity OTC markets.
IMD: Would increased OTC market transparency requirements present opportunities to data vendors and/or exchanges, and if so, what type of opportunities would they be?
Di Giammarino: Transaction reporting can be a headache for many investment firms, as suggested by the £1.575 million fine handed out to SocGen recently and a total of £10 million in related fines levied over the past year. Additionally, in the current tsunami of new regulation, firms may well be willing to pay third parties to take certain compliance problems off their hands. Vendors and exchanges could then leverage such data to create desirable products. Much as the EC is considering a consolidated tape for equities, why not for bonds? If one can grab sufficient market share, the value-add data and services this could offer could prove lucrative.
Baumgarten: It seems likely that increased OTC transparency could potentially offer opportunities for MTFs or competing investment firms to use these prices as reference prices for their trading/business models. This in fact is something already experienced by RMs today, and which is considered to be common practice by most market participants, especially those who support their business models with RM data.
IMD: What lessons can the EC learn with from MiFID's original equity market transparency requirements that it could apply to OTC markets?
Baumgarten: MiFID provides the right framework for the European financial markets, but... there have been problems experienced in its interpretation and application on a national level. It would be helpful if more detailed rules were provided on a pan-European level, meaning a clear application of transparency waivers, clear and unified introduction of OTC trade reporting rules to avoid under-, over- or non-reporting, and uniform introduction of APA standards on a pan-EU level including regular compliance checks.
Di Giammarino: Many of the problems with the original version of MiFID have been raised in the recent review. The major issue will again be one of data consolidation, just as with the equity markets. However, we can't fall into the trap of assuming that what works for apples will work for pears. Though it is all trading activity, there are significant differences in the way that the markets work. A thorough understanding of market practice is required to establish the standards required for transparency.
Schüler: As an overall goal, one should ensure that any additional transparency is actually useful and not an unnecessary burden for market participants. Also, as MiFID has shown in equity markets, fragmentation in execution coupled with a lack of specific standards for trade reporting can easily result in data fragmentation and a loss of transparency. For OTC products, which are much more complex than shares, one must ensure that any publicly reported trade data is consolidated where possible, and that reporting mechanisms satisfy stringent standards.
IMD: Do you believe transparency requirements should go beyond bonds and CDS into other OTC derivatives?
Baumgarten: We do believe that transparency should be introduced for the wider range of derivatives. As a matter of fact, CESR is already envisaging a harmonized pan-European, mandatory post-trade transparency regime for a number of derivatives, including credit default swaps, interest rate derivatives, equity derivatives, commodity derivatives, currency derivatives, asset-backed securities and collateralized debt obligations.
Di Giammarino: A "wait and see" approach would seem the most prudent option. Since MiFID, the markets have not exactly been operating on a business-as-usual basis. There is still some debate about whether MiFID has achieved its goals: while spreads have certainly narrowed, the cost of achieving best execution across the fragmented markets may have actually increased the overall cost of trading. Until the dust has settled, it will be unclear.
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