Delayed and fragmented post-trade data under MiFID is still making life difficult for the UK’s buy-side traders despite greater awareness of the problem, according to Guy Sears, director of wholesale at the Investment Management Association (IMA), a UK buy-side trade organisation.
Before MiFID, delaying the reporting of trades was possible, but infrequently used. Also, most trade reporting was concentrated in one place – the London Stock Exchange. As a result, post-trade data for UK equities was regarded as transparent.
But MiFID allows trade reporting to be delayed for up to three days, dependent on the size of the trade. In addition, the abolition of the concentration rule for trade reporting means that brokers now have a number of venues – MTFs, regulated markets, third parties – on which to report trades.
Sears believes these problems could have been predicted – and tackled – from the start. The surge of new trading venues and volumes has led firms to systemise reporting processes. “Given the sheer volume of trading, you can’t have people deciding whether to delay each trade. It’s not worth the effort,” says Sears. “Sell-side systems are probably coded by default to print trades as late as possible. By using language like ‘a firm may delay a trade’ in MiFID you are effectively asking a firm to make a decision which is really about its default position.”
The potential for delay has an impact on performance measuring for end-clients. If performance is measured by VWAP, or if a client requests a transaction cost analysis (TCA) analysis, the information needed to compile such reports may not be available for three days. This would cause problems for firms who base their trading decisions on trends from the previous day’s trading.
Sears acknowledges that there is now greater awareness of the issue. “When MiFID was implemented and these problems were realised, the buy-side didn’t think that enough priority was given to these issues and thought no one was taking them seriously,” says Sears. “As it became more prominent in the public domain, around July, people have started talking and now everyone at least knows it affects both buy- and sell-side firms.”
But he notes that, especially in the current market turmoil, issues regarding delayed trade reporting have slipped down the list of priorities. “I am not so confident that these problems will be addressed in the near future because this is something that is actually built into the legislation,” he says.
Accurate data is crucial for proving best execution. If over-the-counter (OTC) and market data is complicated to join up, then proving or verifying execution at the best possible price is difficult.
This is where the Financial Services Authority (FSA) could play a role and has already started to look at firms’ best execution policies, although Sears expects large buy-side firms to be able to look after their own best interests.
“If a buy-side firm does not get a good service from a big name broker, they are not just going to let it go,” says Sears. “Therefore, the FSA may play more of a role in analysing best execution between smaller brokers and their retail clients.”