Happy second birthday MiFID II. Sadly, you have not gifted us with the consolidated tape that was scheduled to go live by the end of 2019. In Fixed Income, trading data is already available from a number of sources on a commercial basis. So why the need for a consolidated tape? It may be appropriate for ESMA to enable retail investors in Equities to view trade data, but Fixed Income is a very different proposition.
The FIX Trading Community London regional meeting discussed the possible production of a consolidated tape on July 8th, 2019.
Huw Gronow, co-chair EMEA investment management subcommittee, FIX Trading Community and head of dealing at Newton Investment Management, said a post-trade tape is necessary to give the buy-side an accurate view of what has been traded and what liquidity is not accessible, so they can plan executions with confidence. The buy-side currently must work with data that is not standardised and continues to be inconsistent. And that is just for Equities.
Cathy Gibson, head of dealing at Royal London Asset Management, said that a consolidated tape will bring more transparency and cheaper data. However, regulators should realise that best execution does not just equal the best price. It makes sense for equities but cannot just be transferred into fixed income.
This is the key point, a consolidated tape may work for Equities and retail investors, but for Fixed Income the requirement is somewhat more complex. As we learned recently with our FI TCA product, you simply cannot “copy-paste” the Equity concept into Fixed Income and expect it to work. Fixed Income is still mostly OTC with a huge number of securities that rarely trade.
So, in Equities those same buy-sides buy in data and streamline their order flow by analysing and optimising that data. That data more than likely comes from an exchange or centralised bureau. In Fixed Income, the OTC trading infrastructure does not permit such a construct. Fixed Income data is simply too varied and fragmented for any entity to consolidate it and make it commercially available. As we have also discovered in our conversations with buy-sides, most of this Fixed Income data is of dubious quality and integrity.
In essence, there is too much of it and in most cases, it is worse than useless, but its very existence means it cannot be ignored, plus it also comes at a very high price.
There may however be an alternative proposition that emerges from the increasing use of Fixed Income Execution Management Systems (EMSs). This solution not only addresses the cost structure of data, i.e. why pay upfront for a data package when you don’t know how much you will use? As well as what Cathy Gibson identifies, why is the data confined to just traded volumes and prices when there is so much more other valuable data available?
Data consumers in Fixed Income tend to be the Buy-side, but the Dealers are also data consumers. Looking at data consumption only, however, does not garner the full picture. There are data producers as well. In Fixed Income, conventional wisdom suggests data production is exclusively a Dealer function. Prices, axes, and runs pour out of Dealer desks all day long. There is, of course, a real question mark about how valid this data is in terms of accuracy, actionability, and duplications.
A far more accurate and incisive data output comes from all the daily interactions that Buy-sides have with Dealers, brokers, and venues. That is IB chats, phone calls, RFQs failed and successful, trades, A2A venue matches, auctions, volume matches, switches, swaps, BWICS & OWICS, Portfolio Trades, and ETFs.
Most Buy-sides are largely unaware of how much of this data they create and where if anywhere, they store it. They cannot conceive of how to make it contextualised to their orders and watch-lists, accessible or in any way useful. In the first instance, their daily data output is distributed over multiple systems and venues in different data models. Secondly, it probably is not owned by them. Thirdly if they did want to make use of it, the internal effort and cost would simply be too risky to justify.
Buy-side Fixed Income EMS users, however, have an immediate advantage. Everything they do in terms of RFQs failed and successful, trades, A2A venue matches, auctions, volume matches, switches, swaps, BWICS & OWICS are recorded by the EMS. For any given bond those data points can now be retrieved in real-time and used as pre-trade business intelligence to better inform the buy-side trader about execution strategy.
This works to the extent of using own historical data to automate trades and show which dealer or venue has the best volumes for high-touch orders. so they can plan executions with confidence. In-flight the order execution can be monitored against this data. Post-trade of course, this data can be used again to measure execution performance.
In a previous article entitled “Dealer, Data, and Technology” we discussed how a more disciplined Dealer data model massively simplified and enhanced EMS users' pre and post-trade analysis because the data was strictly segregated into actionable and non-actionable data. When you add this high integrity Dealer data to the proprietary Buy-side data generated in the EMS, Fixed Income data begins to become much more useful. Amazingly it is also cost-free to EMS users.
Back to my point about the danger of “copy-paste” Equity concepts to solve Fixed Income challenges. It may be that the growing use and sophistication of Fixed Income Execution Management Systems (EMS) have already marginalised the case for a Fixed Income consolidated tape, especially for those buy-sides who have already upgraded their Fixed Income technology stack. Happy birthday MiFID II.