A recent error in the reporting of over-the-counter (OTC) equity trades, which artificially inflated exchange group NYSE Euronext’s market share of the UK’s FTSE 100 index in June, has highlighted the continuing problems the buy-side faces in obtaining accurate post-trade data in post-MiFID Europe. This has prompted some to call for regulatory intervention.
Data vendor Thomson Reuters’ monthly European market share figures for June showed a surge in trades reported through NYSE Euronext to €122.9 billion from €32.7 billion in May, lifting its share of reported turnover in FTSE 100 stocks to 32.23%, overtaking the London Stock Exchange (LSE)’s 30.88%. The numbers include executions reported through the respective exchanges’ OTC reporting facilities – €120 billion of NYSE Euronext’s total €123 billion FTSE 100 turnover in June was reported OTC trades.
“The incidence in our monthly market share reporting seems to reflect a number of trades where prices were being identified as pounds when they should have been reported in pence, inflating them by 100 times,” Andrew Allwright, business manager, MiFID solutions at Thomson Reuters, told theTRADEnews.com. “Over a number of trades, that significantly distorted our market share numbers for June in FTSE 100 stocks.”
This type of trade reporting mistake is fairly common, according to Allwright. “We certainly are seeing a significant number of errors where the currency code should be GBp (pence) rather than GBP (pounds),” he said. “If a firm is not a major trader of UK stocks there may be a degree of confusion within data departments around properly flagging these trades.”
A further problem is duplication of OTC trade reporting, for example if a broker reports an off-exchange cross to two reporting facilities and both reports end up in the consolidated data.
Despite continued complaints from the buy-side about the quality of OTC post-trade data since MiFID came into force, there appears to have been little improvement. “It is an issue that hasn’t gone away. The quality of data can be suspect,” said Steve Wood, global head of trading at buy-side house Schroder Investment Management. “It has got better, but it is not to the standard we would have seen in a pre-MiFID regime like we had with the LSE.”
Poor-quality post-trade data is particularly troublesome for buy-side traders because it ultimately affects how they execute, Wood asserted. “For risk programme trades, unclean data could affect the brokers’ risk models, which could widen the prices out,” he explained. “For straightforward single-stock trades it could affect the trader’s ability to evaluate which venue to use or how much he should trade in a marketplace if he’s got a large order.”
Part of the reason for the continuing data quality issues in post-MiFID Europe is that the directive does not require trade reporting facilities to clean up the data. “Pre-MiFID, exchanges such as the LSE required member firms to report trades through them. They charged for this, but they actively monitored the quality of this reporting,” said Allwright. “However, MiFID did not provide for any mechanisms by which data published through the MiFID trade reporting services is monitored for quality and accuracy and errors are picked up.”
In addition, there is no standard process for identifying trade types across the various OTC trade reporting facilities, which can make errors tough to spot. “If present, a standardised process for flagging trades would lead to a lot more clarity about which trades are crosses, enabling firms to check whether there are duplicate prints,” said Wood.
The persistent nature of data quality problems and the lack of a market solution suggests regulators will need to step in. “It is something that no-one wants to take responsibility for, but there is a need going forward, and that is one of the elements that needs to be sorted out by CESR [Committee of European Securities Regulators, which harmonises the activities of Europe’s individual securities regulators] and the regulators,” said Wood. “Whether they do this through guidance or more intrusive regulation is something they have to evaluate.” He adds, “Ultimately, this will probably require more forceful regulation.”
Allwright agrees there is a role for CESR in cleaning up post-trade data, but argues that it need not be heavy-handed. “We believe this issue can be fixed through market consultation with CESR,” he said. “I don’t think it requires draconian measures – it just requires a bit of common-sense market consultation to come up with a cost-effective solution that will encourage firms to report trades more carefully.”
Others suggest that the introduction of a central, standardised source of European post-trade data, similar to that provided by the Consolidated Tape Association in the US, would improve the situation. “Greater accuracy of post-trade reporting would come more naturally once you get to the point where everyone is looking at the same data and knows what it’s supposed to contain,” said Chris Andrew, head of product, EMEA, for J.P. Morgan’s Electronic Client Solutions division. “If people don’t know what the data is supposed to contain, it’s less obvious when there are errors, so a key piece of the necessary feedback loop is missing.”