In establishing exchange competition in Europe, MiFID created a number of market transparency problems for the buy-side. Will MiFID II fix them?
Yes, it should go along way to providing market participants with a consolidated view of the price for any European stock, regardless of how many venues it is traded on.
The transparency of trading activity deteriorated across Europe after MiFID's introduction because of the market's inability to combine price data from trades in a single stock conducted across multiple markets in a standardised, cost-effective way.
As a result, buy-side traders have frequently complained that they do not know whether the post-trade data on which they base their trading decisions and transaction cost analysis is accurate. Failure to make satisfactory progress meant that a mandatory consolidated tape was a certainty for MiFID II from a very early stage.
In its MiFID review consultation document, the EC proposed three options for consolidating post-trade data, all of which would rely on establishing approved publication arrangements (APAs), entities that are required to bring data up to common standards for consolidation.
The first option would formally mandate a consolidated tape of post-trade data to be operated by a single, non-profit entity, that would be established and appointed by legal act, similar to the system used in the US.
The second would also result in a mandated solution, but the consolidated tape operator would be selected via a tender process among commercial providers. This would entail the delivery of data from APAs and trading venues to the operator of the tape, which would then make it available to the wider market at a reasonable cost, or alternatively, require APAs to make their data available for free and then be awarded revenues made by the consolidated tape operator according to a prescribed formula.
The last option – and the least interventionist – would for the EC to frame the standards for creating a consolidated tape via APAs, then allow multiple commercial solutions to emerge within a defined period of time.
Will the EC's proposals succeed?
The success of creating an affordable consolidated tape depends largely on reduced data fees from exchanges, which have faced pressure on pricing, particularly since their market share has been eroded by alternative venues. In response, members of the Federation of European Securities Exchanges committed to a series of initiatives to facilitate data consolidation, including the unbundling of pre- and post-trade data. However, some market participants maintain that the cost of exchange data continues to restrict effective data consolidation. In its MiFID consultation, the EC floated a possible role for the European Securities and Markets Authority in setting exchange data fees.
Will the consolidated tape include over-the-counter (OTC) trading data?
Currently the OTC data on trade reporting venues such as Markit BOAT does not distinguish between trades executed in broker crossing networks, bilateral equity trades between brokers and other types of liquidity – such as give-up trades – that do not involve a beneficial change of ownership and therefore aren't useful for buy-side benchmarking purposes.
In August 2010, a working group established by the Committee of European Securities Regulators (CESR), the pan-European regulatory body that was superseded ESMA at the start of 2011, proposed seven flags to help to better differentiate between the different types of OTC data.
The flags comprised: benchmark trades; agency crosses; give-up/give-in trades; dark trades; technical trades; ex/cum dividend trades; and negotiated trades. CESR added that transaction identifiers should be used to help identify cancelled or amended trades.
Will these flags be incorporated in MiFID II?
The EC's MiFID consultation document made no explicit mention of the working group's recommendations, but it did state that flagging OTC trades would “ensure
that there is much more granular and accurate information about levels of OTC trading”. Furthermore, it is assumed that ESMA will take responsibility for improving OTC data quality under the powers handed to it in the new version of MiFID. While nothing can be taken for granted until the EC issues its draft legislation, expected before the end of the second quarter, it seems there is scope for sufficient improvements to OTC data reporting to facilitate its inclusion in a pan-European consolidated tape.
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