Why is execution data a source of uncertainty for the buy-side?
The liquidity fragmentation facilitated by MiFID dramatically changed the face of post-trade data for buy-side investors in Europe by severely impeding their ability to make investment decisions and accurately assess execution performance.
Following the directive's initial introduction in November 2007, regulators expected the market to consolidate data from multiple trading venues to alleviate the issue of fragmentation.
However, this never materialised and the holy grail of a single standardised consolidated tape for equities traded in Europe – something that has long existed in the US – still does not exist.
But this is not the only issue MiFID presented. The level of trading conducted off-exchange or over-the-counter (OTC) is also a hotly contested issue, as is the breakdown of different types of OTC executions.
For instance, there is currently no commonly-agreed distinction between trades conducted bilaterally in broker-crossing networks and trades that do not result in a beneficial change of ownership, such as guaranteed VWAP trades.
The result has been a lack of consensus on the extent of off-exchange trading in Europe, whether conducted in dark pools or not, which has given rise to concerns in some quarters over price discovery.
But hang on, you said these problems have existed in Europe since 2007. Surely there's been some progress?
Well, yes and no. The industry and regulators are certainly committed to solving the issue but so far there have been no tangible results for the buy-side.
A working group set up by trade body the Federation of European Securities Exchanges made a series of commitments to improve the quality of post-trade data, which included unbundling members; pre- and post-trade data to facilitate affordable consolidation. Meanwhile, another working group established by pan-European securities watchdog the Committee of European Securities Regulators – which was replaced by the European Securities and Markets Authority at the start of this year – devised seven flags to label the different types of executions in post-trade data.
All eyes are now on MiFID II, with the hope the European Commission (EC) will adopt the work carried out by the various interest groups and fix the issues posed by the first iteration of the directive.
But will MiFID II solve all the problems?
Market participants certainly hope so but we'll have to wait until the announcement of final proposals that are expected in October.
Given the repeated calls from regulators for greater transparency in all areas of the financial industry, most would be surprised if a vast improvement wasn't forthcoming.
A leaked draft of MiFID II suggests the EC will favour a commercial approach to consolidated tape, allowing market data vendors to base solutions around a series of pre-defined data standards known as approved publication arrangements.
Data vendors have already begun devising solutions based on existing capabilities that would be ready for use even before the implementation of MiFID II.
The draft also raised the possibility of a consolidated tape for non-equities products could be developed two years after the inception of an equities consolidated tape.
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