EU Rules may shake up equity data

In a move that shows no good deed goes unpunished, industry associations and insiders want to nix a current European Union proposal to improve trade reporting transparency because the new regulation will have a host of unintended consequences.

Under current regulations, firms that conduct trades off-exchange in the bi-lateral "upstairs market" still have to report the trades via their local regulated market. Upstairs markets are used when firms find better prices by trading directly with other dealers on an OTC basis or because they don't want to reveal their trading activity to the wider market.

Now the European Union has proposed The Markets in Financial Instruments Directive, known as MiFiD or ISD2, in an effort to increase transparency as well as competition in the trade-reporting arena. It would force firms to publish prices for trades conducted off-exchange as firm quotes to market, rather than simply offering them to clients. It would also require so-called "systematic internalizers," who match trades internally rather than on-exchange, to publish as firm quotes OTC prices that they currently offer privately. Firms would be able to choose where they publish details of trades, meaning that venues wanting to carry trade data would have to compete commercially.

In addition, firms would be able to stop reporting trades via exchanges, and could potentially sell their data to vendors or via other arrangements.

Sources say that if firms want to sell trade data directly to clients, they will need to create a new data distribution infrastructure before the regulations are implemented. It seems likely that firms will instead turn to third parties, such as exchanges that already publish data but levy a fee for the service—or ECNs or data vendors, both of which have the infrastructure in place for collecting OTC data on virtually all other markets directly from trading firms.

Comments by the British Bankers Association suggest that the vendors, not exchanges, will be the more popular choice. "Our members believe that the right approach to data collection and dissemination is to develop market solutions through information providers," says the group in its response to the proposals.

That's because firms can save the money that they pay exchanges for distributing their data by using vendors instead. In addition, "many exchanges don't have the infrastructure to collect and distribute that data," says Chris Pickles, director of industry relations at network provider Radianz. Pickles suggests that the move could also benefit network providers like his own company, as they could use their connections to markets and user firms to provide a distribution network for data from different sources.

As a result, the new regulations could greatly contribute to the growth of the non-exchange ECN market in Europe.

Sources say exchanges could lose more than just the fees they currently collect for publishing the data; they also potentially stand to lose business—and their benchmark status for equity prices—as a knock-on effect. If large firms want to optimize the benefits of off-exchange reporting, they may shift more of their trading business away from the exchange, meaning that exchanges offer a less accurate view of the market. This potentially creates a vicious circle in which more firms shift business off-exchange because of the less valuable data, which in turn makes the exchange's data worth even less.

Inside Market Data