After November 2007, the markets should be awash with a lot of happy clients, safe in the knowledge that they got a fairer deal from their chosen investment firm. After all, that is what MiFID is all about – more transparency through increased pre- and post-trade reporting. But making it a reality depends on two factors – one, that the IT departments at investment firms get it right and can handle the increased trading data accordingly; and two, that the regulators can tell that the firms really are complying.
MiFID is a much-needed piece of legislation, which demands that firms operating in Europe publish post-trade data within three minutes of the transaction, and that those that process transactions internally rather than on the market (systematic internalisers) publish quotes in real time. The ‘best execution’ requirements also demand that a spread of five pre-trade prices is stored as evidence.
While the confidence of increased transparency is great for clients, it comes at a massive logistical and financial cost to IT departments across the industry. The most common challenges are in capturing the data in the first place for best execution and then distributing it post-trade – levels of connectivity to the market across Europe being the main issue here.
And then there are the reassessments of how order management systems are built, whether the outputted data is in a standard and recognised format, and whether the firm has capacity to archive and store it safely for seven years.
Wait-and-see approach
So how are the firms coping? Chris Brandon, head of storage and disaster recovery at BT Global Services, can sense the frustration among his clients. “The main problem is that most of the compliance guys haven’t revealed the size and scale of what the business wants to do with MiFID, so several IT departments are understandably adopting a wait-and-see approach.”
He adds: “But what they can’t escape is that we expect the amount of data that needs to be stored to reach up to ten times what it is today. And while the large firms do generally have the flexibility to scale upwards, they are already running out of data centre space. They need those critical decisions from the business right now while they still have time to react.”
Without the information they need from the business – such as whether the firm is going to increase internalisation – many IT departments are struggling to get MiFID budget released.
MiFID itself has also been hit by criticism from key institutions within the industry, particularly in relation to timescales. One of the most publicised came from the London Investment Banking Authority. It argued recently that that proposals, such as one about price benchmarking from the Financial Service Authority (FSA), was “distracting scarce resources from the essential task of implementing MiFID on time”.
Transparency unlikely
Meanwhile, others complain that the new reporting regime will not create the transparency for clients that is intended. Indeed, it is possible that with the expected increase in execution venues and the explosion (or disintermediation) in MiFID-related data that they create, it may actually be more difficult to keep a check on whether the firms are achieving ‘best execution’ for their clients at all times anyway.
In effect, regulators are going to have to show that they mean business when it comes down to compliance enforcement if they are to counter this kind of attitude. Twice moving the date for MiFID compliance has not helped to dampen the view that they can be a soft touch. Nevertheless, calling the regulators’ bluff could be a catastrophic move for an investment firm at this stage.
Most likely, the route of disaffection among the investment firms is that they are struggling to see the benefits for themselves. Essentially, more data does not equal an easier way to trade, and although client satisfaction is an important part of MiFID, firms will struggle to learn more about their client for cross- and up-selling purposes from MiFID data.
Their best bet is to collaborate and make money out of the data that they create, which is exactly what some of the biggest firms in the market have recently announced is their intention to do, under a code name, which is widely believed to be Project Boat. The consortium, which includes ABN AMRO, Citigroup, Credit Suisse and Merrill Lynch, are intending to create a platform for pre- and post-trade market data, which implies the benefits of cost savings through avoidance of exchange fees and also through shared IT infrastructure costs.
Mr Brandon comments: “In today’s environment, if these firms can share resources, then they should. Pooling data will enable increased analysis of market data for algorithmic modelling, so this is a great opportunity.
“The most effective way for them to build this is by constructing a network-based grid of data repositories. If shared data centres are linked up around Europe (or even the world) with low-latency/high-bandwidth connections, data can be processed in time zones where the markets are closed so the burden on precious data centre capacity can be managed more effectively. That’s one of the services that BT is looking to provide.”
Of course, shared processing does not mean shared analysis – that is the preserve of competitive advantage – but the collaboration between firms with a view to MiFID compliance is unprecedented.
Small firms may suffer
Indeed, for some smaller firms, MiFID may also end up being less crippling than some analysts first thought. There is already evidence that some of the Tier 2 and 3 firms are looking to outsource their front-office processing function and take advantage of new systematic internalisers. The full impact of more consolidation and collaboration in the market, especially with regards to bypassing traditional exchanges, is something that will have to be digested once MiFID comes fully into effect.
Whatever route investment firms take in response to MiFID, the data challenge is at the heart of it all. Institutions have a clear choice: do they handle data for compliance only, or do they make more of it by selling it on, or analysing for their own strategic advantage? Either way, a firm’s capacity to manage actual volume of incoming and outgoing data will be key.
Patrick Burton is senior marketing manager at BT Global Services.
