MiFID: Unraveling Post-Trade Market Dynamics

by Cubillas Ding, January 23, 2007

Abstract

Paris, France London, United Kingdom 23 January 2007


Under MiFID, Celent estimates that the three largest EU jurisdictions (France, Germany, and the UK) will surface over 100 million additional trades annually. Spending will increase as well, but at a slower rate: from O38 million yearly to close to O50 million.

The Markets in Financial Instruments Directive (MiFID) constitutes the most far-reaching change in the European capital markets ever undertaken -- expansive in its remit of instruments covered, and promising to fundamentally alter the structure of the European capital markets. Post-trade reporting and market data provision will be the first areas impacted by MiFID, according to the new report, .

"In line with MiFID's post-trade provisions and the degree of competition currently shaping up in the market, the areas of post-trade reporting activities and market data will be the first areas where MiFID's unraveling will come into effect, and where the most intense competitive rivalry will occur when the new regime kicks in," says Cubillas Ding, Celent analyst and co-author of the report.

MiFID will increase competition from such players as alternative trading systems, MTSs, and systematic internalizers. The report identifies several other changes resulting from MiFID, including:

  • Both trade publication and transaction reporting will come under severe price pressures due to investment firms increased scrutiny of these areas. Providers will need to achieve significant scale to lower unit costs in order to maintain profitability. Niche players will eventually be squeezed out.
  • Those who currently have a hold on large pools of liquidity will have the advantage if they can preserve a grip on it.
  • The potential for data fragmentation will make it more difficult to get a consolidated view of the market. The most profitable services will package transaction data rather than just report it. This will especially be the case in the UK OTC market. "The need for a consolidated view of trade data, as well as opportunities to draw out value-added information derived from these data will become more pronounced. Therefore, value and hence profits will migrate from providing the mechanisms to capture data to the aggregation of data," says Octavio Marenzi, Celent CEO and co-author of the report.
  • For market data, Germany represents a significant greenfield opportunity because of the emergence of a large volume of off-exchange trades that are currently unreported. Although trade publication and reporting spending are relatively low, the sheer volume of these trades will confer value to firms that can capture and aggregate them as well as sell them as market data.

The report outlines additional impacts of MiFID in the three areas related to post-trade activities, namely trade publication, transaction reporting, and market data provision. It analyses the changes in the three largest EU markets in terms of trading activities from a business perspective, how current mechanisms function, who the current players in the market are, and implications in terms of spending by investment firms in each area.

The 40-page report contains 21 figures and one table. A table of contents is available online.

Members of Celent's Retail Securities & Investments and Institutional Securities & Investments research services can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Tel: +1 212 345 1366

Europe (London)
Chris Williams
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Tel: +44 (0)782 448 3336

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Table of Contents

Paris, France London, United Kingdom 23 January 2007

Executive Summary 3
Introduction 6
Overview 7
  Trade Publication/Reporting 7
  Transaction Reporting 9
  Differences Between Trade and Transaction Reporting 10
Trade Reporting ...  Market Structure and Dynamics 11
Transaction Reporting ...  Market Structure and Mechanisms 15
France 17
Germany 19
United Kingdom 21
Spending Estimates 25
  Trade Reporting 25
  Transaction Reporting 29
  Market Data 31
  Overall Post-Trade Spending 34
Looking Forward 36
  The Rise of New Competitors ...  Project Boat, Equiduct, and Others 36
  The Big Picture 38
Objectivity and Methodology 39

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