Delayed, but not forgotten: best execution and MiFID II (By Guy Warren, ITRS)
With the recent announcement of MiFID II being delayed a further 12 months, affected parties must have breathed a sigh of relief.
However, in that sentence lies a key message: MiFID II is still coming and affected parties are still exactly that – affected. Firms must review and, in most cases, improve their data management, operational processes and technical standards to remain compliant in this new trading landscape. While some of this change is hazy, one thing is certain: many financial instruments will be subject to greater regulatory scrutiny and penalties in the event of issues.
Take fixed income for example. Under MiFID II, a bond trader will be obliged to demonstrate best execution, ensuring among other things an understanding of the characteristics of the order and transparency for the customer. Manual methods of doing so are often cumbersome so technology will need to manage the position before, during and after the trade and its subsequent reporting to the regulator. Technology will also need to support the volumes of data generated in this world, and the speed of analysis and execution to meet the ever tightening reporting times expected.
It is now possible to stream market data from multiple sources into a big data repository for analysis. Moreover, this data can be stored in a read only and encrypted format, making it secure and immutable. Hence, through a simple query on this dataset, an individual could access comparable prices at a specific moment in time and evidence whether or not best execution was achieved.
While best execution is a complex and nebulous concept, exciting developments such as these offer financial institutions vital time efficiencies and some of the bricks required to build robust procedures in anticipation of MiFID II and other directives.
Guy Warren is CEO of ITRS Group
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.