If the US Securities and Exchange Commission plans to leverage Europe's pre-trade transparency experience under MiFID II, experts suggest that the market regulator look elsewhere.
Brett Redfearn, director of the Division of Trading and Markets at the SEC, led the initial question-and-answer session of the third meeting of the regulator's Fixed-Income Market Structure Advisory Committee looking for what experience and anecdotes European fixed-income market participants could share about their first six months under MiFID II transparency mandates.
Various panelists noted that there was a shortage of pre-trade data even though there have been two quarters' of trade reporting.
"When we were looking at pre-trade transparency and how to calibrate it, there was no transparency at all in Europe," said Miranda Morad, general counsel at MarketAxess Europe and Trax. "There was no TRACE-like equivalent, no pre-trade transparency, and no post-trade transparency. It was all a new thing for the non-equities markets in Europe."
The European Securities and Market Authority had minimal data when designing MiFID II's pre-trade and post-trade transparency requirements, she added.
The European market regulator eventual decided to determine an instrument's liquidity based on the size of its initial issuance that would then be followed by its historical activity.
MarketAxess conducted fixed-income liquidity research between 2015 and 2016 and found that such an approach was wanting.
"If anything, issue size has the highest, positive correlation, but it is extremely poor," said Morad. "What you wind up with how tolerant one is for misclassifications. Just because something traded yesterday or last week, is not an indication that it will trade tomorrow or next week."
ESMA assumed that fixed-income market would trade instruments regularly for a few weeks rather than only for initial first few days nor did it realize that the instruments would then trade only sporadically on news-driven events.
As a result, ESMA defined an instrument "liquid," if there were ready and willing buyers and sellers available on a continuous basis and if instrument traded 15 times per day over 80% of the available trading day, according to Morad.
Although ESMA has not published its second-quarter calibration data, MarketAxess calculated that 290 bond, which represents 64 credit instruments and 1.21% of overall trading volume, out of the approximately the 25,000 unique instruments traded that quarter would be considered liquid compared to the 220 instruments deemed liquid during the first quarter, according to Morad.
MiFID II's four-year phased deployment also ensured a limited amount of data to fuel future regulatory decisions, added fellow panelist Mark Yallop, chairman of the FICC Markets Standards Board.
"The phased approach means a smaller portion is being captured at the moment," he explained. "Perhaps a couple of hundred or a half of a percent of all the bonds being traded in Europe. As you can imagine, 95%of the bonds trades are ever likely to be captured has caused several people to question the value of the transparency parts of MiFID II."