Compliance and competing in a transparent market

Transparency - changing market behaviors

While there is a requirement to comply with publishing quotes and trades, there also needs to be a focus on how this new transparent approach will change market behaviors and in what way new data can be used.

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Competitive pricing and managing risk

While the visibility of other dealers quotes and trades, whether from trading venues or OTC data provided via the APAs, will help with price discovery, traders and sales desks will need to build strategies about how to use this data to price products based on visible market activity and how the competition will react to the firm’s own visible quotes.

Understanding the thresholds for transparency

A starting point for strategy is to know when and how transparency rules apply.

Quotes can remain private in certain instances, depending on the quote size. It adds a new strategic dimension to both buy- and sell-side as you decide when to select quote sizes above and below transparency size thresholds. Managing RFQs and responses, balancing size, timeliness of execution, choice of participants in the process and risk of market impact will be new competitive weapons.

Understanding how the various order and request for quote protocols operate by venue also needs to be factored into strategies as well.

Competing with other banks on an MTF, depending on the protocol, traders (or pricing engines) can pick a strategy to price and then choose to react to competitor quotes depending on the firm’s appetite for risk in the instrument.

In order to successfully navigate this new environment, sales desks and traders will need to have access to the broadest and most up to date real time market data both on the desktop and within the firms pricing tools for streamed-pricing, quoting and price benchmarking tools. 

A key partner for effective pricing strategies

You will require better visibility and awareness of market activity more than ever to remain competitive in the post-MiFID II environment. With an ever growing number of data sources, getting an aggregated view of information, both real-time and reference data, will be essential.

We are committed to bringing complete transparency to the market through sourcing all pre-trade and post-trade data. These will be sourced from Systematic Internalisers, APAs, and trading venues.

We will bring them together via Elektron Real Time feeds or displayed on the Eikon desktop, providing you with the most comprehensive, aggregated views on MiFID compliant trade activity. The complete market view in one location.

DataScope Select will also provide access to key MiFID related instrument data allowing the sales and trading desks to make fully informed pricing decisions including MiFID liquidity status and the various threshold size limits that determine the transparency obligations of each individual quote provided.

As with our MiFID I service, our instrument reference data will be mirrored on the real time feeds and Eikon desktops, in line with client consumption needs.

DataScope Select will also expand the scope of intraday and end-of-day pricing, in line with the real-time feeds.

Fulfilling transparency obligations

When trading through a recognized venue in a transparency eligible product, the platform will manage the necessary publication of quotes and trades.

However, when dealing directly with clients or other firms, the responsibility potentially falls to the liquidity provider to publish a quote, but either one or other of the counterparties when it comes to publishing the details of the trade.

Publishing quotes and trades

Understanding whether or not you have to publish quotes poses the first challenge. Banks who provide liquidity to clients from their own book on a frequent, systematic and substantial basis, will qualify as a Systematic Internaliser (SI), though the precise rules for calculating whether a firm qualifies are complex

When asked for a price, Systematic Internalisers in a liquid instrument will need to publish quotes as executable prices across its clients (not just the requesting client) and to the rest of the market as information. There are however a number of waivers and exclusions that can be used on a quote-by-quote basis.

For trade publication, all investments firms, regardless of whether an SI, will have an obligation to publish details of the trade in near real-time or with a delay if the trade qualifies.

Trades must be published through an Approved Publication Arrangement (APA). The selection of an APA trade publication channel is particularly significant for post-trade publication, not only for its technical infrastructure and functional capability, but also from a market impact perspective: it is important to ensuring trade anonymity is not unduly compromised by low volumes of trade publication through the APA in that particular asset class.

Furthermore, investment firms will need to publish the volumes of transactions undergoing portfolio compression via an APA.

Transparency Tools & Services

Thomson Reuters will provide a complete set of tools and services, including an Approved Publication Arrangement (APA) service to enable firms to comply with their transparency obligations.

The APA will provide a pre and post-trade publication service for all transparency eligible products except the equity products already covered by MiFID I. It will be specifically designed to ease the complexities of publication by incorporating deferral and waiver rules into the platform to ensure that only the appropriate quotes and trades are published and at the appropriate point in time.

Importantly, access to the APA will leverage existing infrastructure to allow easy connection to the platform, simplifying workflow and integration.

In addition, we will provide analytics that will allow firms to conduct formal Systematic Internaliser status determination as required on a quarterly basis, as well as market transaction data to help firms monitor their next likely SI status on an ongoing basis.

DataScope Select will also be enhanced so that each instrument record will come with additional tags including MiFID eligibility, liquidity status, applicable size thresholds and average/total market volumes so that firms can calculate their own waivers, deferrals and Systematic Internaliser status.

Our Thomson Reuters Electronic Trading (TRET) will generate the post-trade data required to comply with MiFIR’s transparency requirements for FX Derivatives and allow liquidity providers to segment their client base so only the correct subset of forward outright data is published.