If you thought the heady world of automated trading, dark pools and liquidity fragmentation under MiFID and RegNMS had little effect on the humble reference data function, then you thought wrong, it seems. A recent research note from analyst Tabb Group identifies a growing need for sell side firms to establish comprehensive liquidity management functions, and warns that not having the requisite integrated, enterprise wide reference data infrastructure in place could represent a real spanner in the works.
According to the paper, Liquidity Management: Pushing Automated Trading Beyond Agency Brokerage, although order management and execution management systems are important components in the electronic trading process, they do not address the way brokers interact with order flow, how sell side traders decide to leverage capital or how firms develop consistent valuation and trading strategies across non-exchange traded products. This creates the need for liquidity management.
“A solid reference data infrastruc-ture is important as a firm begins to centralize its execution model,” the paper continues. “If the firm does not have tight control over its reference data, as it begins to combine order flow from different channels or trade products across asset classes, its ability to link, price and accurately trade these products will be impaired.” For example, it says, when trading the capital structure of a corporation, a firm needs to understand the relation-ship and pricing between equity, equity options, corporate bonds and credit default swaps, so it can properly value and trade these products.
The Tabb research note contends that “while firms traditionally have a good grasp of their market data”, their reference data infrastructure “is a bit more problematic”. “The challenge lies in obtaining the vast selection of reference data for over-the-counter and non-exchange-traded products, as there are few centralized authorities that provide a comprehensive selection of this information.” The challenge is compounded by the fact that as soon as a good centralized reference data source is developed, the investment bank will develop new and more complex products that “were not envisioned when developing the original model”.
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