Turning challenges into opportunities

Almost a year after the introduction of MiFID II, it's time for firms to look at adding business value beyond regulatory compliance.

MiFID II posed a significant amount of challenges, and the focus for firms in the immediate aftermath of the January 3rd deadline was basic compliance. In many cases, this has meant finding workarounds that meet the criteria laid out in the legislation, but not necessarily in the most effective or sustainable way. More importantly, these interim solutions lack a value add factor, meaning that they are not helping firms serve themselves or their clients any better than they were prior to MiFID II coming into play.

Now that the dust has settled, the focus for firms should therefore be to go further and start exploiting both data and technology to improve workflows and ultimately enhance their business.

CONNECTIVITY: The cornerstone of compliance

Industrializing the response

MiFID II is a marathon, not a sprint. Firms are waking up to the fact that many of the processes they have put in place for implementation day are not sustainable. To achieve and maintain MiFID II compliance over time – effectively, efficiently, and at scale – firms need to industrialize their processes. They will have to comprehensively rework their trading operations and the IT systems that underpin them, otherwise they will be exposed to operational, compliance and reputational risk in the future.
With rigorous new requirements around data capture, analysis, reporting and record-keeping, connectivity – between external and internal systems, databases and processors – is an absolutely essential part of any effective response to MiFID II.

Systematic Internalisation

We can expect any solution for Systematic Internalisation to contain at least the bare minimum requirements around publishing stock prices close to current market conditions, store data for record keeping and RTS27, and publication of trades to APAs. Supporting multiple asset classes should be possible, at least as long as they can be traded like stocks. To allow for the capturing of events between sales and trading, a basic Request For Quotes workflow should be available as well.

Systematic Internalisation

Competitive factors
  • Mixing SI and non-SI instruments for consistent workflows.
  • Using APA or on-exchange reports dependent on situation.
  • Automatic adapting to SMS/SSTI based requirements.
  • Allowing close interaction for SOR and algos, including RFQs and indications.
  • Proper RFQ negotiations with detailed conditions
  • Automated category/tier/value based responses
  • RFQ aggregation to mix SI with venue requests.
  • Market making multiple asset classes internally side-by-side with external venues.
  • Supporting OTC contracts and combinations
  • Efficiently letting principal interests to aid agency facilitation.

Smart Order Routing

A post-MiFID II landscape has caused further market complexity as well as increased competition. The post-MIFID II landscape now features even more venues, with completely new market models such as continuous actions, block dark pools and Systematic Internalisers. Furthermore, execution post-MiFID II is now governed by an extensive list of parameters such as Large in Scale (LIS), Liquidity classification, Standard Market Size, as well as waiver statuses and much more. All of these considerations must be embedded into the transaction flow in general and into the SOR in particular. This diverse and fragmented set of liquidity providers would be very difficult to access – while taking sufficient steps to follow Best Execution – without a SOR designed for these conditions.

Smart Order Routing

Competitive factors
  • Adapting to agency/principal use.
  • Interacting with the conditional/indicative venues in parallel.
  • Historic and real-time tracking for increased likelihood of execution.
  • Latency awareness.
  • SI specific interaction.
  • Cross currency support.
  • RFQ negotiations.

Surveillance and reporting

MiFID II requires investment firms to monitor all trading activities, for example in terms of execution quality, algorithmic trading behavior, market making activities and client dealings. To minimize the risk of delaying implementation and missing regulatory deadlines, firms should identify all sources that are producing any data needed for correct reporting and monitoring. In addition, the output data requires normalization and enrichments based on classifications.
Athough the first period after the application of MiFID II has granted firms some leniency, regulators are now likely to start imposing stricter interpretations of the regulations, especially regarding Best Execution reporting.

Surveillance and reporting

Competitive factors
  • Consolidation of systems since any third party system data can be consumed through FIX drop copy.
  • Market maker monitoring detection of breaches of the ESMA thresholds, which would force the market maker to sign a market maker agreement with the trading venue.
  • Market abuse detection of certain scenarios running in real-time allowing for swift action to either contact trading venue or block the perpetrator.
  • Leveraging the compliance solution for business intelligence:
    • Program trading support in the form of pre-trade classification of difficulty to trade, at trade performance evaluation followed by post-trade report.
    • Handling of buyback programs.
    • Utilizing the vast amounts of data from RTS 27 reports in order to aid click trading through venue analysis.