Delay of the MiFID places spotlight on best execution


28 January 2016

By: William Fenick

Much has been made of the opportunities afforded by a clearer-cut and more consistent market structure across asset classes heralded under the next incarnation of the European Union’s Markets for Financial Instruments Directive – or MiFID II. Yet time is still very much of the essence when it comes to achieving best execution.

Under MiFID II, the framework of connectivity from a central point to all required execution venues’ trading platforms yields real opportunity for brokers to deliver on the best execution principles, but poses significant challenges.

A substantial amount of data will be available as a result of best execution requirements that might be overwhelming to some customers, while administrative and compliance costs look set to increase. Overall there will be a surge in the number of reporting requirements and the transfer of data between market participants, markets and regulators.

Complexity signals delays

Last November, both the European Securities and Markets Authority (Esma) and the European Commission (EC) made a case for delaying the January 2017 implementation date for MiFID II as regulators and financial institutions alike struggle with the technical complexity of the IT systems required.

Although it stopped short of suggesting a revised timescale, ESMA issued a statement in which it said that it has become evident it will not be feasible to have the necessary systems ready for January 2017. It also identified four key areas where the complexity is especially acute – reference data, transaction reporting, transparency parameters and publication, and position reporting.

Meanwhile, the EC’s preference is for a legal revision that would enable a smooth and effective implementation and push the start date back to January 2018. John Griffith-Jones, Chairman at the UK’s Financial Conduct Authority (FCA), described the potential delay as “not ideal”, but believes an additional year’s grace would mean a more achievable timeframe for firms to get the necessary technology and reporting in place.

Nevertheless, the challenge for trading shops now is to re-evaluate the tools available to them to ensure they achieve best execution. This means fast connectivity, risk management, latency monitoring, and all the accessories found in a top-level US trading shop.

High-speed axis

Faced with fragmented liquidity beyond equities, ultra-low latency connectivity and relatively new pre-trade risk management requirements, financial institutions operating in Europe need to be realistic about their capabilities for participating in a way that’s both in line with the incoming regulatory environment under MiFID II and, most importantly, profitable.

A reliable point of entry, and a flexible technology and connectivity framework is essential if firms are to succeed in interacting efficiently with the new European market structure. As the EU’s main financial centre, London is the logical entry point for US firms wishing to trade not just on London’s resident markets, but also beyond into main European hubs such as Paris, Madrid, Milan, Scandinavia and, crucially, Frankfurt.

Fast access to Frankfurt is essential because it’s home to Eurex, the leader in asset price movements. With many price moves on other markets affected by futures price changes on Eurex, locations offering the fastest connection to Frankfurt are particularly attractive to market makers and other traders.

Furthermore, Central London’s close proximity to main execution venues and easy access to dispersed European liquidity centres makes it the obvious choice for aggregating equities market data. It provides the best access to the main liquidity pools for equities, futures and other major asset classes, not only in the London marketplace but also the key London-Frankfurt corridor.

With infrastructure suppliers increasing the use of mesh network configurations across Europe, trading shops will be able to choose a single, primary colocation site with access to secondary markets handled via a comprehensive mesh of high-speed optical fibre connections – in short, low-latency access to markets from any European market centre. Moreover, leading service providers such as Interxion now support routing speeds for Frankfurt-originated orders to London of about 4.4 milliseconds round trip.

Delivered via state-of-the-art microwave links, these indicate theoretical speeds of 283 microseconds for orders routed from Interxion London to Slough, just west of London where several execution venues like BATS Chi-X Europe and TOM host their matching engines. For routes east to Basildon, home to both Euronext and the ICE Futures Europe derivatives market, theoretical speeds of 281 microseconds are available.

Despite the mooted delay to MiFID II, all trading firms must ensure they have the right amount of resources, processes and tools to support their trading strategies. If you’re serious about trading in Europe, or currently re-evaluating your best execution capabilities, download our Trading Europe white paper.