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MiFID Market Data Challenges Mounting
In the face of exploding volumes, firms are piecing together solutions
September 8, 2008
New trading venues have been popping up all over Europe since the Markets in Financial Instruments Directive (MiFID) became effective late last year. That proliferation has come hand in hand with an explosion in post-trade data that firms must manage to meet customer requirements and regulatory demands.
Even before the launch of high-profile equities marketplaces such as Nasdaq OMX's pan-European venue and BATS Europe, volumes have soared and are expected to rise 1,600 percent in 2009, to 191 million orders a day, according to JWG-IT, a London-based think tank focused on the impact of financial services regulation across Europe. By year-end, the continent will have four times the number of platforms for all financial instruments as the U.S. and Asia combined, and twice the number for equities alone, says JWG-IT in a Sept. 3 report.
Regulation in Europe is primarily principles-based, meaning that the regulators leave it up to firms to devise solutions to meet broad outlines. Since MiFID requires that they provide best execution and be able to prove it for up to five years after a transaction, the data management demands are expansive and not clearly defined. And they are coming into force during a market downturn where IT directors proposing large, costly projects to manage post-trade data are apt to be treated like a skunk at a picnic.
"Meeting the demands of MiFID is a case of being smart," says JWG-IT chief executive P.J. Di Giammarino. "The focus in 2009 should be on, 'where do firms need to put their investment for data?' They can't go across the entire infrastructure because nobody in the front office wants to hear about big capital-expenditure projects. The guys running IT infrastructures need to get smarter and more strategic about where they spend their money and create a migration path."
Under MiFID, firms are required to define a set of scenarios to manage and demonstrate they are tracking the risks and working to fill any gaps, adds Di Giammarino. They need to oversee the intersection of the chief risk officer's interaction with market data; static and reference data; unstructured data such as customer information and risk profiles; and instructions received by phone, instant message and e-mail.
Firms must then maintain that information--and be able to produce it--for years, which can present a problem. "When we survey the firms, we haven't found any that have gone through a test of trade reconstitution greater than a year old," says Di Giammarino. "While they may be able to look at short time windows, few have stress-tested their ability to reproduce the information as MiFID asks for it."
Partial Solutions
Vendors typically provide bits and pieces of the potential solution, he explains, but it is up to in-house technology executives to figure out the overall requirements and design a program to meet them. That doesn't require a comprehensive system ready to go in January, he says: "You don't need to look wall-to-wall at the problem. Instead, try to think about solving it incrementally."
However, hiring half a dozen people in London and Mumbai to manually enter data to link information on different systems isn't the answer. "If you look at doing more of the same, with the really spiking data quantity curves out there ... your infrastructure will grind to a halt and your cost-income ratio will spike," says Di Giammarino.
