U.K. Buy Side Wants Consolidated Tape, Routing Rule
December 15, 2008
Europe needs a consolidated tape, according to the U.K.'s Investment Management Association (IMA), which has issued a set of recommendations intended to improve transparency in the continent's equities market. The buy-side trade group says its members also want order-routing rules similar to Regulation National Market System in the U.S.
"Counterparty risk and settlement certainty dominate the selection process of brokers and venues following the settlement debacle arising in London from the Lehman collapse," said Guy Sears, director of wholesale markets at IMA, in a statement. Information quality has "significantly deteriorated" under the Markets in Financial Instruments Directive (MiFID), which went into effect in late 2007, added Sears.
While a consolidated tape would likely not require that MiFID be altered, an order routing mandate would necessitate some changes. The IMA's recommendations, developed by a number of its dealer and compliance committees, were released shortly after the European Commission initiated an analysis of market transparency under MiFID. The U.K.'s Financial Services Authority has been working with the IMA on problematic reporting issues and will make its findings public early next year, said a spokesperson for the regulator.
According to the IMA, a consolidated tape--a centralized system for aggregated price reporting--would reduce the amount fund managers spend accessing volume and price data from multiple information providers. By requiring exchanges and multilateral trading facilities to forward orders to any venue with a better price, a routing rule would help firms achieve best execution for their clients.
There are notable differences between the best-execution requirements of MiFID and Reg NMS, which was phased in last year. For one, the onus for compliance under MiFID falls entirely on fund managers and broker-dealers, while Reg NMS calls for trading platforms to shoulder some of the burden in routing orders to other liquidity pools.
Encouraging Competition
According to Sears, a consolidated tape and new order-protection rules would bring greater price transparency, helping to achieve MiFID's goal of encouraging competition. "While we have managed to foster competition among trading venues, the same has not been accomplished when it comes to orders," he said. "It is impossible to know whether a trade received a better price on an alternative platform because the money manager does not know where the trade is going." He did not specify how a consolidated tape system could be created.
When executing trades, U.K. fund managers typically depend on their brokers to access suitable market centers as part of their best-execution obligations. While brokers usually provide a monthly list of trading venues, they aren't necessarily the most suitable for their clients. For commercial reasons, some brokers won't even reveal their execution policies to professional clients, said the IMA.
Changes in trade reporting guidelines are making it hard for U.K. fund managers to determine whether their broker-dealers are complying with MiFID. While the European Commission's previous trade concentration rules required that local exchanges publicly reveal data within seconds of a transaction, trades can now be reported by any venue within three minutes. Firms store data on competing prices to prove they met best execution.
But duplicative reporting by multiple parties in different formats makes trade comparisons difficult, and transaction cost analysis services that monitor execution quality are made unreliable by erroneous reports. "One IMA member found that one trade he executed was reported four times--by his broker, by the exchange, by another side's broker and by the prime broker," said the IMA. "He was able to track the trade due to the fact it comprised an odd number of shares. Our members believe the problem lies with reporting brokers rather than the venues."
