Front of mind for buy-side traders are concerns over renewed market turmoil in an unstable macro-economic climate. But worries over regulatory change are not far behind.
More than half those surveyed (55%) in September's poll on TheTRADEnews.com, voiced anxiety over the uncertainty that a return to August's levels of market volatility might cause.
The survey's result came as no surprise to Brian Mitchell, head of business development at United First Partners, an independent boutique brokerage and advisory firm.
“Current short-term volatility is the major point of uncertainty at the moment,” said Mitchell, a buy-side veteran who spent 11 years on Baring Asset Management's London trading desk and a period overseeing Gartmore's trading activities in London, Tokyo and Boston.
“The challenge presently lies in the additional cost and care necessary to execute short-term strategies cost-efficiently,” he says, advising buy-siders to differentiate short-term from long-term execution strategies. “If you're conducting a long-term strategy, you should let it average out over three days. But if your strategy is short term, you need to execute quickly.”
While market turmoil was the buy-side's main source of angst, almost a third (29%) of respondents considered regulatory change to be the primary point of uncertainty.
In September, a new draft of the Markets in Financial Instruments Directive (MiFID) was widely leaked throughout the industry. Significant changes under MiFID II and a newly-drafted piece of regulation – the Markets in Financial Instruments regulation (MiFIR) – include requirements for firms to provide details on their algorithmic trading practices, changes to best execution policies, changes to trading venue categorisation, extensions to the rules of transparency regarding pre- and post-trade, and the moving of standardised over-the-counter derivatives to exchanges or electronic trading platforms. Final legislation will likely be presented officially by the European Commission on 19 October.
Richard Parsons, head of sales and trading at agency broker Instinet Europe, observes that while last year many buy-siders were apprehensive about the effects of increased high-frequency trading (HFT) on market volatility, they may this year be concerned that regulation could restrict HFT, which accounts for some 40% of market volume, according to some estimates.
Parsons pointed out that anything that could affect trading costs in the current environment, would worry the buy-side. This includes not only possible changes to the costs of execution and clearing, but also potential increases in the resources necessary to implement and comply with any new regulation.
“In the past few years, regulatory concerns have done more than any other issue to align the sell-side with the buy-side,” he said.
While renewed market turmoil and regulatory change was foremost in the concerns of 83% of respondents, Andrew Allwright, business manager, MiFID solutions at data vendor Thomson Reuters, was surprised that as many as 17% of respondents felt that incomplete execution data was the biggest source of uncertainty for buy-side traders at present, given the expectations of significant change under MiFID II.
“At the moment, while executions on exchanges and multilateral trading facilities (MTFs) come through on the data feed and are clearly identifiable, a lot of execution takes place ”off the order book' as capital commitment, on broker crossing networks (BCNs) or in dark pools,” says Allwright. “Although MiFID is clear that data must be published, there are no adequate rules around specifically what should be published and how it should be classified.”
But MiFID II aims to resolve this. It is anticipated the directive will pave the way for a commercially-developed consolidated tape, allowing market data vendors to base solutions around a series of pre-defined data standards.
Data vendors – including Thomson Reuters – have already begun devising solutions based on existing capabilities that will be ready for use even before the implementation of MiFID II.
Allwright is also helping to define standards for post-trade transparency as co-chair of FIX Protocol Limited's trade data standardisation group with Jim Kaye, director, product development, European execution services, of Bank of America Merrill Lynch. Despite recent progress, Allwright feels momentum toward comprehensive market data solutions for Europe cannot be taken for granted. “The industry must work together to come up with a useful solution to disparate trade data,” he said.