5 MiFID II Technology Potholes
Five Ways to Prevent MiFID II Technology Decisions From Going Wrong
By Ollie Cadman, Head of Product and Strategy, EMEA, Vela Trading Technologies
On 22 March 2017, Vela hosted an executive roundtable in London on the cross asset challenges of MiFID II. In the first of three event reports, we look at how the participants, who came from across the market, emphasised the need to automate more than ever before, and for greater collaboration between buy-side, sell-side, and technology vendors.
Brokers and investment managers face a short timeframe to resolve big technology issues under MiFID II. The more quantified approach to trading, reporting, and front-office management means decisions will have to be carefully curated.
So what can go wrong?
- Timing is everything: With a huge amount of change and not much time in which to make it, the end of 2017 will be challenging for clients as they work on multiple, simultaneous projects. It is likely that the big buy-side firms will try to avoid this by focusing on their top ten priorities and pushing everything else into the next year. Software vendors will therefore need to both work closely with clients to understand their priorities and be agile enough to deliver more than the minimum requirements in the time available.
- Get engaged: Firms must be able to recreate trades from start to finish, making standardisation crucial across the trade lifecycle. Yet some firms are refusing to engage with competitors, despite cooperation being a necessity in many non-competitive areas. Client relationships are also proving hard to overcome when plain-speaking is needed. Many firms could participate more actively at a senior level in standards groups such as FIX Trading Community, to ensure their needs are met.
- Talk is not cheap: The cost of capturing voice data is very high. Some non-equity asset classes are still currently largely voice-traded. In fixed income, for example, electronic trading only accounts for 25-30% of volume. Under the new rules, quotes made over the phone will need to be captured and printed. However, capturing trade data in the middle of a call and recording it in order to support transparency will also impede speed of trading. Sales people may find that clients look elsewhere if they cannot capture the information in a seamless, automated, and therefore timely, manner.
- Reaching past Europe: With a much wider range of asset classes, including global bonds, in scope under MiFID II, non-European sales people at a broker may need to be trading on a firm’s MiFID II entity, and to report under MiFID II. This will require appropriate reporting systems to be rolled out globally.
- Buy-side costs: Given their relative size, investment firms managing €30 billion or less will have a disproportionate infrastructure cost to cover all of the technology necessary to capture data and report where necessary. This may make it more difficult for them to continue to compete with larger firms unless they can find a cost-effective, scalable way to address the requirements. Vendors will need to offer a range of solutions that align with the different size and scale of both buy- and sell-side firms.
Our next instalment will focus on the political and regulatory landscape around MiFID II.
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.