Designed to improve competition and level the playing field for investors, the EU Markets in Financial Instruments Directive (MiFID) and the US Regulation National Market System (Reg NMS) are poised to drastically change the way the global securities industry handles market data. New research from TowerGroup finds that regulatory compliance will ultimately pave the way for firms to completely automate the trading process.
These mandates will require institutions and trading venues to store massive amounts of market data, even as the volume of trade and quote data continues to grow. As a result, TowerGroup believes these regulations will be responsible for not only creating more sources of market data, but by 2012, could cause a 900% increase in the amount of market data being published. This projected growth, using the NYSE as an example.
“Discussion in the media has focused on the fact that these regulations mandate best execution, which misses the bigger picture” said Tom Price, senior analyst in the Securities & Capital Markets practice at TowerGroup and author of the research. “The ramifications may not be felt immediately, but once Reg NMS and MiFID are final, they will have forever changed the way financial services firms treat data.”
• Regulatory compliance is expensive, but the true challenge will lie in determining where to spend – as global market participants juggle the requirements of bandwidth, capacity, latency, and subsequent storage to support the anticipated flood of market data.
• Trade reconstitution will become crucial “forensic evidence” in proving best execution, and will require gathering and storing every published quote at the time of execution along with any other data points associated with the trade.
• Except for some regional differences between Reg NMS and MiFID, institutions can achieve compliance through an integrated strategy that encompasses both directives. The success of such a strategy depends on combining consistent policies and procedures with improved infrastructure.
“Regulatory compliance will pave the way for firms to completely automate the trading process,” added Price. “Once all the players have done so, the winner in the hunt for liquidity will be whoever can process the data the fastest.”
The new research report titled “Preparing for the Data Flood: Ramifications of Reg NMS and MiFID,” addresses how Reg NMS and MiFID will create more sources of data and drive a greater volume of quote data from each of these sources. The research also analyzes the areas where market participants will have to improve their market data infrastructure and applications.