By Flora McFarlane.
A new report by block-trading specialist Liquidnet says that MiFID II will drive automation in trading, but firms face many complexities and uncertainties on the journey.
Based on primary research with 32 buy-side trading heads, managing $9.685 trillion assets under management, the report found 42% of firms consider the main compliance challenge to be the unbundling of payment for research and execution, while 35% consider pre- and post-transparency to be the key area of concern. Overall, uncertainty prevails, with only 23% of interviewees reporting to be confident of their level of preparedness, while 32% are not very confident.
The systemic internaliser (SI) regime stood out as one of the most unclear aspects of the rules, with respondents raising questions over transparency and reporting obligations. Concern was raised earlier this month at the FIX EMEA Trading Conference around the time period over which a firm can carry risk and be considered an SI, consequently agency broking may not fit the criteria, creating problems in fixed income where risk trading has fallen away.
Just 13% of those interviewed are confident of how SIs will operate after January 2018, yet 55% report that they intend to route to an SI. Activity must be grouped in classes of bonds, which is proving to add to the complexity of the issue. Nearly half of respondents reported positive views on the delay to the roll out of the SI regime until September 2018. Over two-thirds of respondents indicated that they will confirm their voice activity on a trading venue wherever possible.
The report suggests that greatest obstacle for firms to achieve compliance under MiFID II is split between a lack of consistency of definitions and new data requirements, with 74% of interviewees stating these as key obstacles.
Respondents raised questions regarding the viability of transparency with semi-liquid or illiquid instruments, since applying transparency obligations to illiquid instruments will not prove incentivising for traditional market making.
In the face of this uncertainty over how the directive will affect liquidity, 61% of those consulted indicated that they will increase their counterparty list.
Firms are already evaluating a range of statistics to measure price and liquid and opportunity cost, providing more information and help to source liquidity, with 55% of respondents already planning to automate and streamline the workflows. Also 55% are looking to invest in both pre- and post-trade analytics, recognising the need for better use of new data.
The report surmises that firms prioritising investment in personnel and technology will adapt to, and evolve well, with the changes, noting, “Those who embrace the regulatory change, however complex, will benefit.”