The best possible outcome from the MiFID review for buy-side traders would be the introduction of consolidated post-trade tape, according to the latest theTRADEnews.com monthly online poll.
A total of 45% of respondents called for a consolidated post-trade tape, while 23% said they would prefer a clearer definition of best execution, 18% thought ‘greater pre-trade transparency’ would be most welcome and 14% listed fairer competition between venues as the key priority.
The European Commission (EC), which is obliged to review the Markets in Financial Instruments Directive in 2010, intends to review the effects of high-frequency trading and the use of dark pools upon the European securities market, as well as the implementation of the rules introduced in November 2007. Brussels has been reluctant to describe the outcome as ”MiFID II' although there are expectations that clarifications will be made on reporting transparency and categorisation of trading venues.
The poll indicates that buy-side traders see the provision of a consolidated post-trade tape as the most pressing issue. The tape would provide a single source of post-trade data on which to base execution performance following the fragmentation of liquidity across trading venues in Europe initiated by MiFID. With so many venues, there are many prices at which individual stocks are trading, making price discovery challenging for firms. Connecting to all sources of pricing data is expensive, and a consolidated tape would therefore improve price discovery and reduce costs for trading firms.
Commenting on the poll, Paul Squires, head of trading at buy-side firm AXA Investment Managers UK, said the focus on trade reporting data was not a surprise, “Everyone, including the Committee of European Securities Regulators (CESR), thinks we can achieve the consolidated tape. I think we will see that as an outcome of the review.”
CESR is acting as a technical advisor to the EC as part of the MiFID review. On 13 April 2010 it released a consultation paper which supported a mandated tape, noting that “…without further regulatory intervention, market forces are unlikely to deliver an adequate and affordable pan-European consolidation of transparency information.”
Concerns around MiFID's broad definition of best execution were also understandable Squires said, however the review may not be able to pinpoint a definition. “I can understand the disillusionment with best execution. A lot of people were hoping that MiFID was going to tighten up the definition, but in fact it extended it. However the consensus is that best execution is a process – it is not a snapshot. Most of the debate is around who owns best execution, not what it is,” he said.
Neil Burnard, head of compliance at equities focused agency broker Olivetree Securities, suggested buy-side disquiet over best execution could be assuaged by improved price information flows. “If you step back from debates around definitions, it is really commercial imperative that drives best execution. If the buy-side doesn't like the price on offer they can go elsewhere, so there is a real question over whether more prescriptive definitions are helpful or even necessary,” he said. “The real issue is the asymmetry of price transparency as between buy- and sell-side firms. Regulators should focus on the pre-requisites for greater transparency across all products, namely product standardisation and fungibility facilitated by central clearing capabilities. Only then will best execution definitions be really effective and, interestingly, this has been the experience in the US.”
One area in which greater clarification could be forthcoming is that of trading venues. Stock exchanges have argued they are not competing on a level playing field with the newer, cheaper multilateral trading facilities or internalised crossing networks, in large part because of greater regulatory burdens. “The systematic internaliser regime has failed as the quoting obligation is not effective and, in any event, the definition enables many firms to avoid the regime altogether. For crossing networks, the alternative trading system regime in the US provides a useful model, but it would need to be tailored to fit European markets,” said Burnard.