FIX has been at the forefront of electronic trading for over two decades now. Whilst its roots, for obvious reasons, are within technology departments, it has been a combination of technicians and those on the business side that have pushed its evolution. The buy-side have been heavily involved over the years in key FIX initiatives as electronic trading has grown. Today, heads of trading at asset management firms and hedge funds are spearheading some of the major initiatives that the FIX Trading Community are working on. Whether this is MiFID/regulation related, electronification of the IPO allocation process, TCA or execution venue analysis, senior buy-side individuals across the globe are working together to make sure that the evolution continues.
The acronym MiFID can be enough to send people into a tailspin as well as the level of technical detail required. To add to the complication, there is a degree of subjectivity surrounding some of the finer points of the text which creates additional challenges around who falls into scope and how. Yet January 2018 is fast approaching and all participants will now need to make regulatory change a priority.
From a FIX Trading Community standpoint, decisions are already being taken by industry participants. Although the amount of detail within the text is daunting, the EMEA Regulatory Subcommittee have already convened a number of times to decide on where FIX could produce some tangible work in the form of guidelines. Six initial topics were identified as areas where FIX would start up working groups and look in detail at the MiFID II text:
- Best Execution
- Order Data and Record Keeping
- Reference Data
- Clock Synchronisation
The benefit of the FIX Trading Community is that it encompasses a broad spectrum of market participants. Buy-side, sell-side, vendors, exchanges and venues and other trade bodies make up the membership and it is always key to ensure cross-industry participation to find solutions that work for the majority.
Each of the working groups is currently looking at the finer detail within the text to try and help members navigate their way. To highlight some of the complexities with MiFID II, we can look at the work that the Best Execution Working Group is currently undertaking. To be clear, Best Execution covers all investment firms which will mean buy-side, sell-side, exchanges and venues.
A food chain is now involved in the reporting process. Firstly, there is a requirement for exchanges and venues to publish information on the quality of the execution provided by their market. The sell side will be required to review this information and then adjust their own best execution policy accordingly. Then the sell-side are required to publish information on the top five venues that they used on an annual basis. The buy-side in turn then need to provide their own best execution policy to their clients based on the information that they have received and their own market intelligence.
Ultimately, the key driver of MiFID II is investor protection and to provide greater transparency to investors. The complexity of the sell- and buy-side obligations only really starts to manifest itself when you look at scenarios in depth. A plain vanilla cash equity transaction between buy side and sell side potentially has a large number of variables:
- Buy-Side to Sell-Side discretionary order flow on exchange only
- Buy-Side to Sell-Side discretionary order flow on exchange and internal prop book
- Buy-Side to Sell-Side discretionary order flow on exchange and internal prop book after internalised crossing
- Buy-Side to Sell-Side where Sell-Side is acting as a liquidity provider but not SI (OTC)
- Buy-Side to Sell-Side where there is a specific instruction to Sell-Side
- Buy-Side direct to venue via DMA
- Buy-Side to Sell-Side to Sell-Side to Trading Venue
For the sake of brevity, we will leave it at cash equities but it is important to understand how many different scenarios there potentially are and how that will impact the best execution reports required of investment firms. Of course, it is important to note that MiFID II is multi-asset class. These above scenarios need to be examined and replicated for fixed income, derivatives, commodities and structured products.
Post 24th June, it would be fair to say that the waters have been somewhat muddied by the referendum decision in the UK. Understandably, the market is in a state of flux about next steps and the market hates that sort of uncertainty. From a FIX perspective, it is important that we keep a business as usual attitude. FIX works with regulators and authorities across the globe and will retain its neutrality to ensure it can address the changes in direction of regulation.
Just to conclude, MiFID II implementation will require effort and cost from every company involved in trading. However, the mantra of the FIX Trading Community is to increase transparency, keep costs low through the use of standards and work on the production of common standards. We encourage you to find out more about the MiFID initiatives we are working on within the FIX Trading Community.