By Will Haskins, for GlobalTrading
With only months to go until MiFID II’s regulatory requirements come into force, Europe’s trading desks are readying themselves to meet the new trade reporting and enhanced best execution mandates.
As ever, much of the concern is over the cost of the new reporting regimes. Even as market participants wait for further clarification on rules for extraterritoriality, the work must begin. Trading desks need to make sensible assumptions about those issues with outstanding interpretations to make sure the technology and workflows are ready to be deployed.
While larger buy-sides will use this as an opportunity to extract further technology resources from cost-conscious management, smaller firms may struggle with the added burden. For the larger asset managers, the minimum requirement that buy-sides demonstrate best execution for their end clients will likely be expanded into a TCA analysis engine to rival those traditionally developed by the sell-side. For the smaller investment firms, the increased burden of proof may encourage them to outsource more of their trading operations to their brokers or third party service providers who can amortise the technology development cost across multiple clients. Speaking at the recent GlobalTrading Uniting Regulation and Technology Roundtable in London, kindly hosted by Itiviti, many of the buy-sides present said they were already testing new platforms to meet MiFID II compliance in January 2017. One of the buy-sides present had already started development on marrying parent TCA data with order routing data and granular tick data in the cloud. Another buy-side explained how MiFID II has reduced their ability to lean on brokers, as best execution and trade reporting has to be handled internally.
However, there will still be opportunities for sell-sides to provide delegated or assisted services for MiFID II reporting obligations, and this conversation will be on-going through 2016 and into 2017. Buy-sides currently use aggregators to access conditional venues, as large-in-size venues will be a major part of buy-side trading going forward, but the access will sit more comfortably within the buy-side, perhaps as a service offered through their EMS providers. This will likely change the broker’s role in such a trade from a value added one to that of connectivity.
One of the headaches buy-sides will encounter is the challenge of measuring the quality of their trade when they have multiple conditional orders in multiple venues, where there may be a match in one or multiple venues. Sequencing may offer a possible solution, but this may place the buy-side at risk of lowering their reputational score within certain venues. Certain buy-sides are willing to rest liquidity for long times, in large size, in venues that they trust, but the problem comes when the other side of the trade meets the trader in one of eight venues, but then the initial resting liquidity appears to fail in the other seven. Ironically, the attendees agreed the attempts to re-aggregate liquidity appear to be a counteraction to MiFID I’s fragmentation of liquidity.
The shift to trading more in blocks, driven by dark trading caps, must be solved by new technology, as one buy-side trader lamented the amount of sizable liquidity on their blotter that they are currently unable to represent on the venues they participate in. Whereas sales traders previously solved this situation, the current regulatory environment pushes buy-sides to search for a technological solution that already existed in human form.
The question was raised as to whether buy-sides using voice traders should hold them to the same market impact standard as their algo providers and the tentative answer was yes. Both algos and voice traders pass through the same TCA process, and one buy-side trader suggested voice traders be held to an even higher standard. Even under MiFID II, technology will continue to be an enabler of trading, even if it is a high touch trader using an algo to execute the trade.
Much of the recent focus has been on the raw compliance side of MiFID II implementation, and ensuring all regulatory obligations are met. Traders need to transition into the long-term perspective of asking how they can run an effective trading business, while operating within MiFID II’s regulatory requirements. However, most firms seem to be successful when focused on one or the other, which has given rise to outsourcing components of the non-focal point: e.g. trading to EMS providers or reporting to brokers.