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Information Post MiFID – How far are we? Niki Beattie

BØRSMÆGLERFORENINGEN. Information Post MiFID – How far are we? Niki Beattie Managing Director, The Market Structure Practice. AGENDA. Start at the beginning – how did we get here? The impact of MiFID on pre and post trade information

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Information Post MiFID – How far are we? Niki Beattie

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  1. BØRSMÆGLERFORENINGEN Information Post MiFID – How far are we? Niki Beattie Managing Director, The Market Structure Practice

  2. AGENDA Start at the beginning – how did we get here? The impact of MiFID on pre and post trade information The cost of market fragmentation What do we mean by a consolidated tape? Do we need one or can we manage without? What are the barriers to consolidating data without regulation? Is regulation likely and if not what happens? The impact of further data consolidation on the market

  3. Start at the beginning Pre MiFID Trading on domestic Exchange mandatory in some European countries and domestic Exchange owned and transmitted 100% of the data set Off Exchange Trading allowed in some countries but differing rules e.g. UK – mandatory reporting to the Exchange Exchange owned 100% of the on and off exchange data set and sold it to consumers e.g. Germany – no mandatory reporting of trades Approximately 50% of trades by value went unreported to the market Post MiFID On Exchange trading monopoly broken by introduction of competition Off Exchange trading allowed by must be reported to a venue of choice – new reporting venues such as BOAT and Reuters Best Execution Policy established with very broad parameters

  4. Incumbent market share is declining Market share transfers to new Venues Incumbent Exchanges not yet competing Fragmentation Is regional The impact of MIFID: Electronic Order Books

  5. BATS Europe 1.74% Turquoise 2.07% Markit BOAT • Market Share of all venues • including OTC – Sept 2009 • New venues take a large share • of OTC business • Off Exchange business not • increasing SIX Europe 3.23% 20.18% NASDAQ OMX Nordic The impact of MiFID: On and Off Exchange 4.08% Spanish Exchanges 4.77% 6.62% Chi-x 19.44% 8.01% LSE Group 9.42% 11.46% Deutsche Borse Euronext Euronext OTC Source: Reuters Sept 2009

  6. MiFID lowered explicit trading costs but did not address implicit costs • There is more information than ever before • Information costs money • Incumbent Exchanges have not changed data pricing since MiFID, despite losing market share • Some Exchanges trying to put up data prices to compensate for loss of revenue in trading • Most MTF’s don’t charge for data but ultimately have a strong incentive to monetise it if they can • New Venues (e.g. Markit Boat) introduced charges for OTC data The cost of fragmentation

  7. The precedent for a consolidated Tape Amex Redistribution of profits The US has a consolidated Tape - in fact 3 consolidated tapes : A, B, C Clear best execution rules and a trade through rule exist Consolidated Tape association established in 1970’s (pre demutualization) to disseminate real time trade and quote information world wide Exchanges act as Administrators Tape A for NYSE listed stocks – Administrator NYSE Tape B for AMEX listed Stocks – Administrator AMEX Tape C for NASDAQ listed stocks – Administrator NASDAQ BATS NYSE Tape A NYSE Listed Stocks = $X,XXXX,XXXX NASDAQ Contribution made by each platform Calculates the NBBO BOSTON CHICAGO Onward distribution globally

  8. Do we need a Consolidated Tape? Consolidated data for BP on 17 Nov 2008 14:51:52 Source: Equiduct

  9. PRE TRADE • Does everyone know or need to know what’s changed? • Large sell sides have created their own consolidated tape in order to assess smart order routing options and achieve optimal execution • Buy Side rely on brokers to achieve smart order routing and best ex • Broad definition of best execution allows some brokers to continue to execute only on the primary market • Market led solutions exist (Reuters, Bloomberg, Equiduct) but you have to pay for the underlying data feeds • Currently only paying for the primary incumbent exchange fees • Bespoking possible. No standard view – are you looking at the same as me? Do we need a Consolidated Tape?

  10. POST TRADE • Market lead solutions exist (Reuters, Bloomberg, Markit Boat, Equiduct) but you have to pay for the underlying data feeds in real time • Off Exchange data more fragmented and the value and accuracy of the data is uncertain • Does everything get captured? • Poorer quality of data and possible double counting • Effect of fragmentation has been regional - Most complaints coming from the UK where the biggest change has been felt • Hard to support trading decisions • What benchmark do you use for TCA? Do we need a Consolidated Tape?

  11. COST • Exchanges no incentive to reduce cost • New providers need to charge but how valuable is their data? • Overall costs increase • BUNDLING • Exchanges bundle their data offering • Data vendors bundle their services • LACK OF STANDARDS AND POLICING • No one monitoring data across different countries • No clear standards and calculations devalues the data • CLEARING AND SETTLEMENT & MULTI CURRENCY • Lack of a single clearing house complicates the price/cost • Stocks may trade in more than one currency Key barriers to consolidation without regulation Exchange Exchange Exchange CCP CCP CCP CSD CSD CSD

  12. Regulators remain silent; may be protecting national interests • Fragmentation still seen to be a regional issue • Not in the interest of the incumbent exchanges • It’s an issue of economics – can financial regulation solve that problem? • Closely related to best execution • Without regulation you need: • Strong supplier management • Clear messages to regulators • A convergence of accepted standards Are we likely to get regulation?

  13. Better visibility , transparency and execution for all • Increased cost of capital commitment • Continued loss of market share for the incumbent exchanges (NYSE dropped below 30%) • Indices forced to change their calculations • Ability to better define best execution • Improved adoption of smart order routing • Cost of data aggregation should go down Impact of improved data consolidation

  14. Significant fragmentation of the market has occurred but the effects have been regionalised • The cost of obtaining a consolidated view of the market is greater than it was pre MiFID and the value less certain • The US has one tape with clear standards . Europe has several commercial alternatives with no clear standards • Post trade data is causing the most problems • Cost is a huge barrier to further consolidation • Lack of standards and monitoring is a significant issue • Regulation similar to the US is unlikely in the near term • Many market providers will be losers when data consolidation increases but the end user should be a beneficiary Conclusion

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