Bond market participants said better data tools and improved reference price availability will help the buy side make, rather than take, prices and that European regulators missed an opportunity to provide more useable data.
The International Capital Market Association held regional workshops across Europe in the final quarter of last year for members to discuss their experiences after MiFID II went live at the start of 2018, particularly in cash bond markets. In addition, panelists were asked to identify future trends for electronic trading and innovation under the new European Union regulations.
ICMA’s latest quarterly report said that panellists broadly agreed that technology and machine learning (or artificial intelligence) will have a significant impact on bond market structure and practices, especially in research, data, and trading.
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The ICMA report said: “In the area of data, the panelists thought that, with better data tools and improved reference price availability, buy-sides will be better able to “make” prices (rather than being traditional price-takers).”
Over time this will result in the buy side and sell side becoming more equal in providing liquidity.
“With advanced data analytical tools, leading to better reference pricing, buy-sides will feel more comfortable trading on central limit order books, with the buy side setting the price or limit as to where they will trade,” added ICMA.
Rise in all-to-all trading
In the US there has been a rise in all-to-all trading, where all the participants in a network can trade with one another, according to a report from consultancy Greenwich Associates.
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Kevin McPartland, managing director, market structure and technology at Greenwich said in the study: “Including all electronic trading volume that allows anyone to match with anyone regardless of trading protocol, all-to-all trading now accounts for 8% of investment-grade volume in the U.S., and 23% of all volume on MarketAxess in the third quarter of 2018, up from 16% a year earlier. This is evidence of the buy side voting with their collective mouse, as they also overwhelmingly view all-to-all trading as the most likely source of new liquidity in the next two years.”
MarketAxess, the electronic trading platform for fixed-income securities, intends to expand its all-to-all platform, Open Trading. This year MarketAxess announced the appointment of Chris Concannon, former president and chief operating officer of Cboe Global Markets, to help drive this growth as part of his role.
Rick McVey, chief executive and chairman of MarketAxess, said in a statement: “His experience in the global exchange industry, automated trading, foreign exchange and the exchange-traded fund market will be highly valuable as we drive further expansion of Open Trading, build on our strong presence in international markets, and continue to deliver innovative technology solutions to the market.”
The ICMA panellists expect an increase in algorithmic tools such as autohedging, internal crossing on the buy side and large blocks being broken down into smaller, more easily tradeable orders to preserve liquidity and minimise market impact.
Data availability and usability
ICMA panellists also felt that Europe missed an opportunity with respect to pre- and post-trade data for bond markets. MiFID II introduced transparency and trade reporting requirements in fixed income for the first time.
“Currently the data is not standardised and therefore not reliably useable,” said ICMA. “One of the key problems seems to be in the data structure at the foundation level, held within the Esma database infrastructure.”
The report cited the CFI (Classification of Financial Instruments) code which defines a financial instrument at issue and remains unchanged during its entire lifetime. However, the CFI codes in database held by the European Securities and Markets Authority often contain errors and there is no simple process to make corrections.
“Incorrect CFI codes directly affect downstream data processes such as liquidity calculations (whether an instrument is deemed liquid) and the quality of public pre- and posttrade transparency data provided by trading venues and approved publication arrangements (APAs),” said ICMA.
MiFID II also did not mandate a consolidated tape for fixed income which operates as a utility. All the ICMA panellists agreed that a consolidated tape in Europe is needed as soon as possible.
“Participants further expressed the view that the consolidated tape should be a non- commercial, single-source utility similar to (but not necessarily the same as) Trace in the US,” said ICMA. “The view is that data accessibility and usability will be compromised until a non-commercial consolidated (raw) data tape or “utility” is available throughout Europe.”
The panels felt that the quality and usability of data needs to improve for the bond market to reap the benefits of MiFID II.
“One further useful outcome of MiFID II/R, on which participants could all agree, was that it has forced firms to undertake an in-depth review of their business and current workflow and practices,” said ICMA. “Business rationalisation and future-proofing have thus turned out to be a beneficial externality of MiFID II for many market participants.”