Improved trade reporting and greater transparency as a result of MiFID II will help market participants to make more informed trading decisions, according to industry experts.
Despite some positive developments in European equity market data provision in recent years, structural issues mean it remains difficult for institutional investors to gain a comprehensive view of trading activity across the continent.
But standardised codes for reporting trade types, a tightening of OTC trade reporting rules and restrictions on the use of pre-trade transparency waivers – three measures outlined in the MiFID II text agreed upon by politicians in January – will all help to improve the quality of data available to the market, which will result in improve execution, according to Alex Clode, business manager for core equity sales and trading at Bloomberg EMEA.
"One area which has been a problem since the first MiFID is post-trade transparency, particularly around the reporting of OTC trades as there were no strict requirements on where firms had to report to. MiFID II will seek to remedy this by putting more responsibility on redistributing parties to ensure data is of a good quality," he said.
Pan-European exchange operator BATS Chi-X Europe has already taken steps to provide more robust OTC reporting with the launch of its BXTR service. The service was launched after major banks expressed dissatisfaction with Markit's OTC reporting facility, which was closed shortly after BXTR launched last year.
Adam Eades, chief legal and regulatory officer at BATS, said: “We launched our OTC trade reporting service, BXTR, last year and are very supportive of efforts to improve the data that is available to the market.”
BXTR has already signed up many of the major brokers to report their OTC trades, including Citigroup, Credit Suisse, JPMorgan, Morgan Stanley and UBS.
“We’ve also been very engaged in the market model typology (MMT) project and hope to adopt MMT before anyone else in the market, before the end of this year,” added Eades.
MMT is one of many industry efforts that will support the more robust reporting framework for trades that MiFID II demands. This week, MMT became a FIX administered standard, meaning it will be operated and maintained by FIX Trading Community with standardised message formats for all participants, which should simplify its use for data gathering and analysis.
MMT was developed by the Federation of European Securities Exchanges to support recommendations on improving post-trade information made by the Committee of European Securities Regulators – forerunner of the European Securities and Markets Authority (ESMA) – in 2010. Widespread adoption of MMT should make it considerably easier to consolidate post-trade data regardless of whether a trade is on-exchange or OTC, or where the trade was conducted.
"MiFID II will provide added granularity to the data in terms of the types of trades conducted, with standardised trade condition codes in the form of the MMT. This will result in much better data being available to market participants," said Clode.
Focus on pre-trade
While efforts to increase transparency of post-trade information have been relatively uncontroversial, changes to pre-trade transparency waivers in MiFID II have raised some eyebrows.
European legislators have been concerned that transparency waivers, which facilitate off-exchange trading in crossing networks and dark pools, have been used far too widely since they were introduced in the original MiFID. The new legislation will seek to curb their use by forcing firms using the most common waiver, called the reference price waiver, to ensure trades are only executed in dark pools when meaningful price improvement has been obtained around the mid-point.
Carl James, managing director of BNP Paribas Dealing Services UK, believes legislators have taken the right approach to increase the amount of information available to all market participants, while at the same time still providing reasonable options to trade in the dark when needed.
“Transparency is always an issue, because the person putting on an order does not want to give any information away, which could expose their trade size and strategy. Conversely however, people want to receive as much transparency (information) as possible to make a more informed decision about each trade,” he said.
“Pre-trade data is just as important as post-trade to help you see whether you are achieving best execution. For us, pre-trade transparency means we can have a much better conversation with our clients about how we formulate our trading strategy.”
Hope on consolidated tape
Another issue MiFID II will look to tackle is the long-running saga of creating a consolidated post-trade tape for Europe. BATS Chi-X Europe has long supported the implementation of a consolidated tape that can be used by investors to benchmark their performance and is hopeful that the new directive will spur the industry into action.
“There remain concerns about the progress made on creating a consolidated tape for Europe and it may be that competition regulators need to step in to look at market data pricing,” explained BATS’ Eades. “We have priced our data at what we believe is a commercially reasonable cost, which is well below the market average and we hope this will act as a benchmark for others.”
Following the landmark political agreement reached in January, MiFID II’s final legislative text is currently being finalised and is expected to be published in the coming weeks. Once it has been formally approved by politicians it will then be sent to ESMA, which will take responsibility for moving the legislation to the implementation stage and developing detailed rules for the market.