MiFID II: The Data Conundrum
Trading and execution venues, the members who use them and the National Competent Authorities responsible for monitoring them will be required to provide and use data more effectively to deliver a more transparent, robust and efficient market. The recent announcement to delay the implementation of MiFID II to enable the European Securities Markets Authority sufficient time to implement its data infrastructure highlights the extent to which regulators intend to rely on the provision of accurate and reliable data. Yet data alone is of little value. The real benefit will be to establish what data to collect, when, where and how to use it to provide a competitive edge. No more so than in the provision of Best Execution.
From operating conditions to organizational and reporting requirements, every investment firm and relevant service provider will be impacted across multiple business lines. To successfully manage the increasing volume and complexity of data across individual firms and industry-wide will require wholesale change to policies and procedures as well as greater harmonization of standards.
In an environment of declining access to traditional information flows, the ability to interact seamlessly between automated and voice trading to access liquidity where it is available will be vital. Access to reliable, accurate and timely data will be what ensures successful implementation of best execution policies as the buy side battles market forces. Knowing what to ask of your data to interrogate and analyse execution processes correctly will be critical — pre-, at- and post-trade.
Under RTS 28 (Best Execution) data will need to be captured at each transaction/order level, such as the percentage of passive/aggressive/directed orders; which will need to be stored for future recall if necessary. The data must then be mapped and attached to every order for reporting purposes. To maintain the data’s accuracy and reliability, consistent management and control will also be required. This controlled data can then be fed into various post-trade feeds for allocations, confirmations, affirmations and surveillance or global order and risk monitoring.
In an increasingly competitive environment, selecting the right method of execution yet retaining flexibility to respond to market conditions will create the edge. As access to quality information flows declines, the ability to demonstrate not only to regulators, but also end clients, that they are trading at the right time and in the correct manner to meet not only their regulatory obligations but also to maximise returns and minimalise potential losses.
As best execution moves across the asset classes, it becomes increasingly evident just how complex this is to achieve. The increased shift to managing intangible implicit costs is not only more difficult to calculate but requires multi-faceted analysis. The different in price between when a decision is made and the executed trade may be impacted by size, momentum, spread and volatility, individually or collectively. Hence the industry need to identify the correct questions before interrogating data effectively. Once questions can be agreed on what constitutes an order, an arrival time or what price points should be used - then analysis can be effective enough to establish a fair comparison.
The core of the successful provision of Best Execution will be to provide a consistent approach backed up by a statistical dataset across the liquidity spectrum and different methods of execution. The backbone of access to reliable, accurate and timely data will be what ensures successful implementation of best execution policies; helping firms to effectively answer the MiFID II Data Conundrum.
- Fixed Income