"The time for speculation is running out and the real implementation work is upon us, MiFID II is little over 18 months away. The closer we get to the 3 January 2017 deadline the clearer the size of the impact of the deadline becomes. MiFID II will radically reshape the European market, making seismic changes to market infrastructure, mandated systems and controls, the way in which algorithms can be used to trade, the way clients are on-boarded, the rules governing execution and a plethora of other equally fundamental market concepts.
One area in which MiFID II will undoubtedly have an enormous impact is data publication. MiFID II’s pre and post-trade transparency rules will cause a massive amount of new data to be published to the market. In addition to this, new rules around reasonable commercial basis, instrument data publication, best execution and execution quality reporting will further compound the issue, and that is not to mention all the additional reporting to regulators that firms will need to do as well with new fields in transaction reporting and algo testing reports.
Collectively the public presence of all of this new data will provide a banquet for firms and vendors alike to feast upon on post 3 January 2017, and the impact on the market is likely to be substantial.
In the context of massive operational changes that firms must make despite remaining uncertainty, ESMA last week announced a three month delay in the publication of the Regulatory Technical Standards which will give colour to the level one text. Instead of being published in July, the RTS will now be published in September. This creates a real problem for the many firms that were taking the view that their implementation teams need more certainty to operate, and were therefore delaying until July to seriously kick-off their programmes.
New regulatory concept
The problem is that leaving it until July was cutting it fine as it was, by September there will be only 15 months until the new regime goes live, and that simply will not be enough time to get all of the change done. Therefore the only conclusion that can be drawn is this, firms must run with the level of certainty that they have now.
Trading venues and firms registered as Systematic Internalisers will be required to publish pre-trade data for a full set of trades (subject to certain waivers) in both equity and non-equity instruments. The pre trade data that MiFID II asks for is bid and offer prices with the associated volumes. This will substantially increase the regulatory burden on firms acting as SIs, which incidentally is likely to be a much greater number of firms than currently are under MiFID I due to a change in the definition, but will arguably have an even more substantial effect on price transparency.
Trading venues and firms registered as SIs will also be required to publish post-trade for the same full set of trades both equity and non-equity instruments. The post-trade data that MiFID II asks for is a timestamp, an instrument identifier, the trade price, the trade volume and a venue identifier. This will further increase both the regulatory burden and transparency in the market. The bottom line is that it will be much easier for firms, regulators and anyone else who takes an interest to see what is happening in the market and who is doing what.
All data publication under MiFID II will have to take place under the terms of a brand new regulatory concept; reasonable commercial basis. This concept states that prices of market data must be based on production cost, data must be provided on a non-discriminatory basis and be provided on an entirely unbundled basis. Along with these obligations there are further transparency obligations, for market data to qualify as being provided on a ‘reasonable commercial basis’ providers must publish their full price list in a manner which is ‘easily available to the public’ and broken down to show details such as fees per display/ non-display, discounts, and licence costs. This is going to force firms and vendors to fundamentally alter the way in which they provide their data to the market.
Additionally each execution venue (which includes firms operating as an SI) must report execution details for each financial instrument available to trade on its venue; information to be reported includes ‘information relevant to the likelihood of execution’ and ‘information relevant to the execution price’.
So, what does this overwhelming expansion of data publication in European markets mean? Well, much remains uncertain and how exactly all of this new transparency will affect the market time will only tell, but based on what we know so far and taking into account some lessons from MiFID I some things are clear.
This is going to be difficult and expensive from the point of view of firms and venues. The amount of reconfiguring and rewiring required just to capture the data that will now be required will be a huge undertaking, particularly in the realm of non-equities in which such transparency will be entirely new.
Trading is based on intelligence and increased transparency will increase the amount of information available to act upon in the market. Post-trade transparency in particular, if we take on board what happened in the wake of MiFID I, will likely lead to smaller trade sizes and the emergence of new liquidity providers.
The great MiFID II data banquet will be a feast the size of which has never been seen before, with the amount of available market data increasing by many multiples overnight on 3 January 2017, but for many market participants the only real result may well be serious indigestion."