The headlines are pun-filled and panicked. The story that publications and blogs tell is that if you’re trading in Europe, you should be afraid of the Market Abuse Regulation. Very afraid.
The EU’s Market Abuse Regulation, “along with its sibling, the Market Abuse Directive, pose a double threat to market participants worldwide,” claims one commentator.
The Market Abuse Regulation, set to come into force Sunday — including in the U.K., the Brexit vote notwithstanding — goes beyond the Market Abuse Directive. It ups the ante on surveillance of insider dealing and market manipulation on European stock exchanges and ushers in an era of governmental control over multilateral trading facilities. We at OneMarketData take the view that participants should feel less panicked about MAR than the fevered headlines suggest and instead regard it as a competitive opportunity.
The immediacy of the MAR deadline and the breadth and prescriptiveness of the rules are what excites the pundits and acts as a source of stress among market makers. The concurrent wave of European market transparency regulations — MiFID II, MiFIR, BCBS 239, EMIR, REMIT and so forth — for some creates a sense of drowning. Yet for those who can take a step back and see the big picture, the raft of new transparency and monitoring rules creates competitive opportunities that outweigh the costs.
First, let’s look at the imminent MAR deadline. As deadlines go, it’s a fuzzy one. Some bits of MAR won’t come into force until the Markets in Financial Instruments Directive II definitions on which they depend are finalized, in January 2017, and those may vary by jurisdiction. As the Financial Conduct Authority said on the heels of the Brexit vote, “Regulation [derived from EU legislation] will remain applicable until changes are made.”
Market participants are struggling with fundamental interpretation questions. The European Securities and Markets Authority had to release an updated Q&A in May to clarify that the rules do apply to buy-side firms. At recent conferences, firms debated provisions related to inside information, market soundings and the interpretation of Accepted Market Practices. A survey by London-based law firm Linklaters, released on June 21, concluded that fewer than 5 percent of firms are “completely ready.” All this means is that the July 3 deadline is the start of a chapter, not the end of the story.
So, don’t panic. Take a deep breath, and focus on the most essential steps, one at a time.
Step 1: Make sure you are collecting the data you’ll need. I was surprised to discover that many asset managers in Europe don’t collect their own trade data. For MAR, as for MiFID II, you’ll need a record of every transaction, order, cancel and correction. You’ll need to join all of that with market data — but it is always possible to obtain market data later. You’ll be able to add the tools to answer the regulatory questions later too.
Step 2: Avoid the BEAR trap. Yes, the buy-everything-and-reconcile trap. On a recent visit to London, the trading head of a small broker-dealer told me that he had purchased MAR-related software and now needed historical market data for it. He lamented that he would next have to buy similar products for best execution and trade reconstruction, as well as add resources to reconcile between the proprietary databases and symbologies they used. He did not care that the U.S. office of his firm already had strategies for best execution and compliance in place. “Different regime,” he said. Yet regulatory convergence, which crosses the Atlantic, means that the data you need and the questions to be asked of those data are almost the same.
He thought it was a top-down approach. But he had fallen into the BEAR trap — the trap of seeing each regulation as a one-off problem needing an independent solution that will have to be coordinated after the fact.
Some coolheaded firms have tackled the same problems bottom-up, by deploying a time-series database and a streaming-analytics engine capable of storing the transactions as they arrive on the wire, then joining the collected history to other data sources. They mutualize market data collection costs through a cloud-based on-demand market data vendor. With these in place, the requirements imposed by MAR and MiFID II’s best execution, as well as by algorithm performance metrics and trade reconstruction, can often be addressed by simple queries over the collected data, either historically or live. With a single gold copy of the data, there’s no reconciliation to do.
Step 3: Take advantage of a MARvelous opportunity. What at first looks like a series of unconnected regulatory problems actually gives way to a systematic, cost-effective strategy that kills several birds with one stone. It can do more than save money by avoiding the BEAR trap. The same transaction store and time-series database that complies with MAR can answer questions that save trading costs, enhance commission revenue and produce robust forecasting models. For those with cool heads, a coherent, data-first approach can create revenue opportunities and enhance return on investment in a way that is competitively meaningful.
Dermot Harriss is senior vice president at OneMarketData, a fintech firm headquartered in Hoboken, New Jersey.