Paving the Way for European Regulatory Reform: An Evolution in Electronic Fixed Income

Market data and the battle against latency

Irrespective of asset class, informed trading and management decisions rely on access to optimal market data. However in fixed income, before the crisis erupted, money was made or lost on moves of one hundredth of a percentage point - one basis point - or less. Now, much larger swings happen daily and so price discovery, verification and validation are more important than ever before.

New regulations such as MiFID II will have a strong emphasis on accurate and reliable market data. Inevitably all platforms offering best execution will need connectivity to sources of such data.

While the influx of electronic trading volumes will introduce new data sourcing and management challenges, the intention is that eventually the introduction of a consolidated tape will protect the market and support best execution. The mechanisms and timing of such a system are still under discussion, but again it will depend crucially on the wide distribution and use of accurate market data.

[JP Morgan Forms Electronic Trading Management Committee] On the back of both regulations and client demands, banks have also started to move from end-of-day valuations to intra-day or even real-time checks to drive accurate analysis, pricing and risk management decisions. This requires very rich market data, delivered with minimal latency.

Conclusion

There is no doubt that the regulatory reforms under way will change the way European market participants trade fixed income. There will be much work needed to prepare for requirements relating to clearing, trade reporting, transparency, and regulation of trading venues, and certainly a move towards electronic trading. It is likely that even a number of electronic trading venues themselves will not meet the requirements and will require substantial changes. Participants will need to examine their execution, clearing and reporting arrangements, evaluate which providers are compliant and which are not, and get ready for change.

On the other hand, the more transparent, regulated electronic markets and the forward-thinking market participants that have adopted them in advance of any firm rules being set by the policymakers are likely to require less change.

It is only once the final rulebook has been published that participants will know what kind of an impact the new regulations will have on their specific day-to-day trading activities, but until that time they could do a lot worse than to embrace the electronic revolution.

Roger Barton is a Regulation and Market Development Advisor at MTS.

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