Buy-siders calling for the European Commission to end the chaos in Europe’s equity markets caused by liquidity fragmentation should think again, says Andrew Allwright, business manager, MiFID solutions, Thomson Reuters.
The perceived lack of progress in creating a consolidated view, either of pre- or post-trade data across Europe’s myriad trading venues, has added to pressure on Brussels to address data fragmentation in any ‘MiFID II’ directive. In particular, there have been growing calls for an officially mandated European best bid and offer data source. Although the public sector has taken a leading role in reshaping the financial markets in the aftermath of the recent global credit crisis, Allwright insists that commercial solutions are still the best way of delivering addressing greater transparency in the equity markets.
“The over-the-counter (OTC) space is troubling, but it’s far better [compared with imposing further legislation] to use the guidance from the regulators to establish best execution than have the Commission come in,” says Allwright.
He admits that the buy-side has every reason to be frustrated at the increased cost and diminished quality of pan-European equity market data, pointing out that over-reporting of trades has contributed to greater inaccuracy. But Allwright also points out that, piece by piece, the problems are being tackled. For example, guidance was issued in early June by the UK regulator, the Financial Services Authority, to standardise how brokers report different types of trades.
As a market data provider, Thomson Reuters has been deeply involved in trying to provide equity market participants with greater clarity, not least through the .xbo Reuters Instrument Code used to identify the best bid and offer across multiple European trading venues. The firm now also offers a global transaction cost analysis (TCA) product to both buy- and sell-side clients.
Thomson Reuters already supplied a service to help US sell-side firms demonstrate compliance with best execution under Reg NMS via a Thomson acquisition, MSI. Leveraging its access to exchange data from across the world, it decided to develop a global TCA offering that would address some of the common challenges of benchmarking trade execution in increasingly fragmented equity markets. In Europe, Thomson Reuters first offered its Global Transaction Cost Analytics (GTCA) product to second-tier banks and brokers, but has more recently been marketing the product to buy-side firms too.
A key complaint of many European buy-side firms since the introduction of MiFID has been lack of venue-specific execution data from TCA providers and lack of coverage of OTC trading and dark pools. Thomson Reuters’ GTCA product allows users to measure their performance against the primary exchange, or a customised cross-market best bid and offer, and various flavours of VWAP (all venues or venue specific). It also permits users to split out executions on key dark pools such as Liquidnet, ITG and NYFIX Euro Millennium.
As Thomson Reuters looked to put together its TCA proposition, the firm commissioned an independent consultant to survey the opinions of 40 buy- and sell-side users of existing TCA services from brokers and independent providers. The research revealed dissatisfaction with current TCA offerings on a number of levels. Common complaints included delays in report generation after data upload, over-use of paper-based reports, complexity of reports and high costs, especially for customisation, one-off reports and inclusion of additional geographies and/or trading volumes. Quality of data was also a major problem.
“Different exchanges report market data using a variety of different formats and fields,” explains Allwright. “Thomson Reuters has created a number of standardised trade types and has exchange relationship managers who are responsible for ensuring that messages from exchanges are correctly matched against these trade categories on an ongoing basis. Other TCA providers don’t necessarily have the same knowledge or resources and this can result in poor quality benchmark calculations.”
The report also noted that real-time, ad hoc and on demand analysis and reporting was expected by most users. In addition, TCA users said they valued supplier independence, user-friendly web-based interfaces, flexible and tailored benchmarks, and advisory services. Thomson Reuters already provides an advisory service to US clients and will be rolling this out to European clients in due course. The firm’s premium real-time capabilities will also be made available later this year.
Thomson Reuters also believes it may hold a price advantage over certain existing providers. While the independent research found that users spent an average of $47,200 per annum on TCA, Thomson Reuters’ GTCA offering starts at less than half this, at $20,400 (€15,600).
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