MiFID will bring to the surface over 100 million additional trades annually in the three largest EU jurisdictions of France, Germany, and the UK, according to a new report on the directive by consultants Celent. Spending will increase as well, but at a slower rate, from €38 million a year to nearly €50 million.
Celent says post-trade reporting and market data provision will be the first areas impacted by MiFID. “In line with MiFID’s post-trade provisions and the degree of competition currently shaping up in the market, the areas of post-trade reporting activities and market data will be the first areas where MiFID’s unraveling will come into effect, and where the most intense competitive rivalry will occur when the new regime kicks in,” says Cubillas Ding, Celent analyst and co-author of the new report, MiFID: Unraveling Post-Trade Market Dynamics.
The report predicts that MiFID will increase competition from such players as alternative trading systems, MTSs, and systematic internalizes.
The report identifies several other changes resulting from MiFID, including:
– Both trade publication and transaction reporting will come under severe price pressures due to investment firms increased scrutiny of these areas.
– Providers will need to achieve significant scale to lower unit costs in order to maintain profitability, and niche players will eventually be squeezed out.
– Those who currently have a hold on large pools of liquidity will have the advantage if they can preserve a grip on it.
– The potential for data fragmentation will make it more difficult to get a consolidated view of the market.
– The most profitable services will package transaction data rather than just report it, and this will especially be the case in the UK OTC market.
”The need for a consolidated view of trade data, as well as opportunities to draw out value-added information derived from these data will become more pronounced,” says Octavio Marenzi, Celent CEO and co-author of the report. “Therefore, value and hence profits will migrate from providing the mechanisms to capture data to the aggregation of data.”
For market data, Germany represents a significant greenfield opportunity because of the emergence of a large volume of off-exchange trades that are currently unreported, says the Celent report. Although trade publication and reporting spending are relatively low, the sheer volume of these trades will confer value to firms that can capture and aggregate them as well as sell them as market data, the consultancy predicts.
The report outlines additional impacts of MiFID in the three areas related to post-trade activities, namely trade publication, transaction reporting, and market data provision.
It analyses the changes in the three largest EU markets in terms of trading activities from a business perspective, how current mechanisms function, who the current players in the market are, and implications in terms of spending by investment firms in each area.