Due to the lack of clarity around the details in the Markets in Financial Instruments Directive (MiFID), many financial organisations aren’t yet acting on the regulation, despite the November 2007 deadline for compliance. According to a survey conducted by SunGard towards the end of last year, almost two thirds of European financial services firms have no overall plan or are yet to fully identify MiFID-related budgets. Organisations generally aren’t saying how they see MiFID impacting business and some are reluctant to discuss the regulation at all.

Where organisations have taken action around MiFID it’s at a very high level. In our experience, such pro-activity has yet to filter down to the parts of a business that work with market data. For market data managers, and the vendors that provide them with data, the most significant impact of MiFID will be the proliferation of data sources and the commercial issues surrounding availability. In particular, it’s still not clear whether the data will genuinely be made available on a level playing field. And there are also cost issues, such as how many venues will need to be connected and what communication or development costs this will entail.

What will MiFID achieve?

Despite the uncertainty and cynicism that surrounds MiFID, the long-term aims should be beneficial. Over time, MiFID should significantly lower the costs for trading and access to market data while increasing the transparency of instrument pricing. There will be greater opportunities for certain investment firms to generate additional revenue through increasing internalisation of order flow, both in terms of a larger proportion of their own order flow and through increasing the amount of external orders that they internalise. From a vendor’s viewpoint, MiFID may break the monopoly of exchanges over price data — breaking up monopolies is always a good thing — but due to the additional venues that they will need to collect data from and the increased costs of doing so, this may also increase the barriers to entry for other would-be market data consolidators..

Issues to overcome

The consistent enforcement of MiFID across Europe is a major concern. The views of market regulators across the continent may differ as to what is deemed acceptable within their country and how to tackle contraventions. The Investment Services Directive — the forerunner to MiFID — failed partially due to host regulators adding their own interpretations and ‘gold-plating’ parts of the mandate. A home regulator will have loyalty to its own market and to its domestic banks. Successful application of MiFID at a pan-European level is difficult to imagine when the interpretations of other European regulations lack consistency in the market place. Until regulators begin codifying MiFID in their markets this remains a speculative scenario, but the possibility may account for why many organisations have yet to act on MiFID.

It is presently unclear how many new market data generating venues will emerge across Europe. But of greater importance is determining which of the systematic internalisers (SIs) will become key market data sources. To some extent this depends on current market share and future business plans for pan-European trading. Beyond this, it becomes a case of ‘hedging your bets’. Based on current and perceived market share, market data companies will have to estimate which new feeds will become vital. If 50 SIs appear on day one of MiFID, which of these will become critical business feeds? The London Stock Exchange and Deutsche Börse are pre-requisites for a market data vendor launching a service in Europe. The same principle for these exchanges also applies to SIs. Over time, some will disappear, others will be bought or become niche players and only a few will end up becoming essential market data sources.

With new data resulting from MiFID, the first target for any vendor is to obtain licences for the data to be used across its relevant set of products and services. But no-one knows how accessible or at what cost market data will be available. MiFID talks about availability of data on ‘reasonable commercial terms on a non-discriminatory basis’. But there is no consensus as to how this will be enforced. An SI could engage in an exclusive deal with a large vendor. Access could be granted to the data by the vendor at a deliberately prohibitive cost. However, the data would still be available via the internalising bank’s Website, but in a form that makes it difficult to integrate or achieve low latency delivery. In such a scenario, would this be seen as breaching the regulations, and if so, how would it be challenged?

With such uncertainties, market data providers have been unable to launch concrete plans around MiFID. Connecting to multiple new data sources will require additional communications and development expenditure. But this is nothing new to an established market data vendor. As vendors already collect data from hundreds of sources around the globe, the addition of a few new sources within Europe will simply be a requirement of the business. Once new feeds are identified they will be added swiftly and appropriately. Market data vendors have a commitment to provide businesses with relevant market data from their core markets, and will continue to do so post-MiFID.

Who are the real winners?

Those most likely to benefit from MiFID are major financial institutions and vendors who provide the ‘plumbing’ for a MiFID solution, such as connectivity, order routing and market data platform suppliers. Some vendors are giving their products a lick of ‘MiFID-friendly paint’ and announcing them as the panacea to all MiFID woes. But until the picture becomes clearer, such claims are premature at best.

Market data aggregators will have to invest to cope with the impact of MiFID – identifying and buying new feeds, enhancing communications and developing new software. It will also be important to work closely with existing and emerging providers of liquidity and data, as well as other providers of market data-related solutions. The real solution to MiFID rests upon a range of products and services, and customers will be best served by companies working together.

For market data vendors, the process of understanding MiFID is under way. Although many ambiguities and reservations surround MiFID, it’s a safe bet that the number of market data sources will increase following implementation of the regulation. At first, there is likely to be an explosion of sources, which will then settle down through attrition and consolidation. Whatever the scenario, market data vendors will respond appropriately to the impacts of MiFID and ensure that the necessary data feeds are available to the industry.