Fragmentation of liquidity has introduced new complexities to the job of the European buy-side trader, but these challenges have been intensified by the lack of a Europe-wide best bid and offer source and consolidated price tape. Since MiFID’s introduction in November 2007, many buy-side firms have complained about the lack of tools to re-aggregate liquidity. As we approach the directive’s second anniversary, is a solution any closer?
Buy-side traders currently find themselves overly dependent on sell-side tools and data, not only when identifying the most optimal channels and venues for their orders, but also when measuring execution performance. Furthermore, portfolio managers need accurate information to establish the amount of overall liquidity in a stock across all venues, but may not necessarily require the level of granularity provided by a European best and offer feed.
To an extent, the issue is one of buy-side independence and performance. Standardisation of price and bid/offer data across Europe would give buy-side traders a surer idea of where orders should be directed and which trading venues to ignore. Post-trade, it would remove any uncertainties over potentially one-eyed broker reports and allow a more accurate analysis of execution performance, particularly for those stocks that trade the majority of their volume away from the primary exchange.
“While some buy-side firms –including some of the hedge fund community – may have the technical capabilities and IT budgets to build their own data solutions and smart order routers (SORs), most long-only managers will find themselves heavily reliant on sell-side supplied tools,” comments Mark Winter, head of dealing at Insight Investment. “We need our own access to data to be able to test and question the effectiveness of sell-side SORs on an impartial basis and without consolidated data we can not do this as effectively as we would wish.”
Although Winter notes that most asset managers are cognisant of the fact that they now have to search deeper and more thoroughly to get a full picture of where liquidity lies, he contends that “there are not enough hours in the day to be as forensic as would be optimal”.
Data vendors and large sell-side firms already have the capabilities and methodologies in place to provide proprietary solutions that meet specific needs. Therefore, in the absence of a standardised, mandated solution, third-parties can provide the buy-side with functionality such as real-time transaction cost analysis tools sent via FIX which allow traders to examine how trades are executed tick-by-tick ¬– a feature Winter thinks will become ubiquitous in the near future – as well as a more detailed breakdown of how trades were executed, i.e. percentage of trades done in the dark vs. lit and by venue.
“Sometimes we use sell-side data post-trade just to inform us which trading venues have and do not have critical mass, so we can justify having only very modest representation in a certain venue, for example,” says Winter. “We use this data and build up a historical dataset ourselves, when it’s really something that should be given to us via a consolidated price tape.”
Winter contends that an ideal European best bid and offer and price tape solution must allow traders to view where at least 85% of pan-European blue-chip liquidity is at any one point, and would therefore have to encompass the full depth of book of the primary exchanges and trading activity on Chi-X Europe, Europe’s biggest MTF with an 11.4% share of pan-European trading in September, according to Thomson Reuters, plus the next five most significant venues, including quotes from market makers.
As a member of the Investment Management Association, the UK-based buy-side body, Winter is well aware of the ongoing discussions between the buy-side and market data vendors and is keen for these to be brought to a fruitful conclusion. “I’d like to see more evidence that we are close to a solution,” he says.
To vote in this month’s poll on the consolidated tape, please click here.