While there has been much focus on improving pre-trade transparency in post-MiFID Europe through the introduction of a European best bid and offer (EBBO) data feed, fragmentation of post-trade data is also causing headaches for buy-side traders, prompting calls for a single, centralised source of trade reporting information.
However, as with the pre-trade consolidated tape, creating a post-trade equivalent for Europe is unlikely to be quick or easy.
Buy-side traders need a complete view of post trade data in Europe because while pre-trade information helps to determine the most appropriate execution price, trade reports allow them to benchmark execution performance and make informed decisions when seeking liquidity.
MiFID revolutionised post-trade reporting by allowing a choice of venue. Before the directive, brokers could only declare trades to the relevant primary exchange. Now, they can choose to report either to a regulated exchange, a multilateral trading facility (MTF), a third-party trade reporting venue, such as Markit BOAT, or “through proprietary arrangements”.
In theory, a broker could report a trade to a regulated exchange far removed from where the trading took place, or even on a company website, making assembly of a complete post-trade picture near impossible.
“What MiFID did was bring in complexity, not so much just from the fact that there are multiple venues where you can execute, but because of where the trades are being printed,” says Paul Squires, head of trading at buy-side firm AXA Investment Managers.
A further complication is the ability under MiFID to delay reporting of over-the-counter (OTC) principal trades of a certain size for up to three days, which can punch more holes in post-trade data. In general, OTC principal trades are conducted by sales traders on brokers’ ‘upstairs’ trading desks, but virtually all the flow in dark pools are executed on an agency basis.
While many market participants feel the answer to post-trade fragmentation is a consolidated, centralised reporting and dissemination facility for Europe, similar to the one provided by the Consolidated Tape Association in the US, there is some debate about what data should be included in such a facility.
Unlike on the pre-trade side, OTC data can be included in a consolidated post-trade facility because agency OTC trades must be reported almost instantly under MiFID. However, some feel the inclusion of OTC trades could skew data feeds and consolidated benchmarks.
Brian Schwieger, head of algorithmic execution, EMEA, at broker Merrill Lynch, argues that, thanks to the fact that some dark pools allow users to set a minimum trade size, it is not always possible to execute against all volumes in those pools.
Schwieger contends that if a firm is using a tape including dark-pool post trade data to feed a percentage-of-volume algorithm, the publication of a large block trade would prompt the algorithm to believe that it was hugely behind the day’s volume. “The algorithm would tear through the order book trying to catch up,” he says. “You wouldn’t want that to happen.”
Although there are barriers to creating a consolidated European post-trade feed, Europe’s regulators have recognised the challenges posed by current environment and are working to address them. On 10 June, the Committee of European Securities Regulators (CESR) the European Commission body charged with ensuring regulatory harmony across Europe, said it would conduct further work “to better understand and assess issues surrounding the calibration of the deferred publication regime, the cost of accessing post-trade data and the consolidation of data”.
CESR has already taken action on the pre-trade side. On 20 May, it issued guidance endorsing the use of an EBBO as a price source for dark pools employing MiFID’s reference price pre-trade transparency waiver. Shortly afterwards, on 2 June, pan-European MTF Turquoise received regulatory approval from the UK Financial Services Authority to use an EBBO for its non-displayed mid-point book.