MiFID has undoubtedly made its impact on the industry. FIXGlobal collates opinion from Nomura’s Andrew Bowley and BT Global Service’s Chris Pickles on the success of MiFID and its next manifestation.
Having digested the massive changes MIFID brought to the EU two years ago, what has the financial community learnt from the content of MIFID 1 and the process whereby it was developed and implemented?
Andrew Bowley (Nomura): First and foremost we must conclude that MiFID has worked. We now have genuine competition and higher transparency across Europe.
Costs are down. MTFs (Multilateral Trading Facilities) have brought in cheaper trading rates and simpler cost structures, and most exchanges have followed with substantial fee cuts of their own. Indeed this pattern is also clearly demonstrated by exception. The one country where MiFID has not been properly introduced is Spain and this is one country where fees have effectively been increased. This teaches us that complete implementation is the key and the European Commission needs to look hard at such exceptions.
We have also seen clearing rates reduced, though the fragmentation itself has caused clearing charges to increase as a proportion of trading fees as typically the clearers charge per execution. Interoperability should help address that, assuming a positive outcome of the current regulatory review.
In terms of lessons learnt from the process we must consider that we have experienced a dramatic change in a short period of time, and should allow more time for the market to adjust before fully concluding or looking to further wholesale change. We are certainly still in a period of transition - new MTFs are still launching; and the commercial models of all of these, mean that we are far from the final equilibrium. To have so many loss-making MTFs means that we cannot be considered to be operating in a stable sustainable environment.
Chris Pickles (BT Global Services): MiFID is a principles-based directive: it doesn’t aim to give detail, but to establish the principles that should be incorporated in national legislation and that should be followed by investment firms (both buy-side and sell-side). Some market participants may have felt that this approach allowed more flexibility, while others wanted to see specific rules for every possible occasion. The European Commission has perhaps taken the best approach by allowing investment firms and regulators to establish themselves what are the best ways of complying with the MiFID principles, and has perhaps “turned the tables” on the professionals. If the European Commission had tried to tell the professionals how to do their job, the industry would have been up in arms. Instead, MiFID says what has to be achieved – best execution. Leaving the details of how to achieve this to the industry means that the industry has to work out how to achieve that result. This takes time, effort and discussion. FIX Protocol Ltd. helped to drive that discussion by jointly creating the “MiFID Joint Working Group” in 2004. And the discussion is still continuing. A key thing that the industry has learned – and continues to learn – is to ask “why”. Huge assumptions existed before MiFID that are now being questioned or proven to be wrong. On-exchange trading doesn’t always produce the best price. Liquidity does not necessarily stick to existing 100% execution venues. Transparency is not sufficient by just looking at on-exchange prices. And the customer is not necessarily receiving “best execution” from today’s execution policy.
Scott Fitzpatrick, Vice President / Business Manager of FIX Marketplace for NYSE Technologies breaks down the increase in FIX allocations in post-trade, with buy- and sell-side commentary from Wellington Management and Nomura.
Recently there has been a growing trend of post-trade allocations being delivered from the buy-side to their brokers via the FIX Protocol. Over the past year, we have witnessed significant growth in the number of allocations being sent via FIX through our FIX Marketplace community. Comparing the first half of 2009 to the first half of 2010, we have found that allocations sent via FIX has grown over 70%. We believe this high growth could be the start of a true paradigm shift in how the allocation process is treated.
Post-trade allocations are the breakdowns of a block trade – executed in any asset class – to a buy-side firm’s underlying client funds. Historically, allocations have been communicated to the broker by a variety of means and methods like phone, email, or fax as well as various other electronic systems.
These typical methods are failing to keep up with the faster pace of today’s trading requirements and the need to reduce risks and costs from a firm’s trading processes. As the financial industry continues to grow in new directions, we have reached a critical juncture in how post-trade allocations are handled and many forward-thinking financial institutions are turning to FIX to help solve this issue.
Why Change is Afoot
Today’s trading systems handle thousands of client orders and instructions in mere micro-seconds. With such lightning fast systems in place, the post-trade settlement process still takes days to complete. The global banking and market crisis that has occurred over the recent years should drive financial market regulators and practitioners to seriously look at changing the settlement process by reducing the risks and costs associated with the post-trade process.
For example, in Europe, where pan-European trading platforms are becoming the norm, so too will the eventual introduction of pan-European settlement. In this case, and others, reducing risk and costs will result in changes to the lifecycle of the trade and increase the demand for much shorter settlement cycles – possibly even to settle transactions on the day of the trade.
Even without the market dictating change, firms are still looking to reduce costs in this area as every cent spent is under laser focus in order to meet investor and client demands.
Today, we see two main ways in which institutions are trying to reduce this friction through FIX.
Moving traditional middle-office functions, such as allocations, closer to the point of execution
Modifying current post-trade practices to include all asset classes, particularly futures, options and Foreign Exchange
Bringing Allocations Closer to the Point of Execution
Because of the industry’s demand for immediately available information, firms today are looking at trade allocations – once considered to be a purely middle office function - as being an integrated part of the trading process. Buy-side firms are moving middle-office functions like allocations onto the trading floor as they look for new ways to communicate trade details between two trading counterparties.
By moving the allocation process to the front-office, errors relating to allocations can be recognized earlier in the settlement process. This, in turn, helps to mitigate trading errors as the trade moves through the settlement process. This shift in workflow requires new ways to communicate information between trading counterparties. Since FIX is a well established protocol and is ingrained in the current trading workflow for order generation, buy- and sellside firms can take advantage of existing technologies to push FIX into the post-trade process. This has led innovative firms to begin communicating allocations and, in the future, possibly even confirmation details using the FIX Protocol.