Originally appeared in MiFID Monitor
Three leading and emerging European multilateral trading facilities (MTFs) have teamed up to boldly go where no man has gone before – that is, to create a common symbology for market data on securities traded across Europe’s suddenly and increasingly fragmented markets. Bats European Markets Division, Chi-X Europe and Nasdaq OMX Europe have formed an open industry working group to develop a uniform symbology framework for trading European stocks.
The move appears to have several motives. First, it seems to be aimed as a step toward creating a consolidated tape for pan-European stocks. The recent London Stock Exchange outage (Market Data Insight, September 2008) illustrated an unhealthy reliance on the primary exchange’s benchmark trade data, the absence of which frightened away buy-side managers and precluded alternative venues like Chi-X and Turquoise from truly benefiting from the LSE’s downtime.
By providing a common symbol system for the set of securities that are traded on a pan-European basis by the participating MTFs, a consolidated tape of trade information could be developed for that specific pan-European market. During a discussion of this topic at an industry function sponsored by connectivity provider Fidessa, Bats Europe CEO Mark Hemsley said the creation of a consolidated tape for pan-European stocks would be a “practical step” toward the wider – and perhaps unassailable goal – of a truly European consolidated tape that would provide trade information on all European equities traded on all venues. The EU’s Markets in Financial Instruments Directive (MiFID), while attempting to introduce transparency in a heretofore opaque area of the business, has in some ways added to fragmentation of trade information. The emergence of the Boat trade-reporting initiative – now operated by Markit – was widely welcomed, but it is regarded as expensive and doesn’t provide the complete picture of the marketplace.
Other initiatives by market data vendors like Reuters and Bloomberg to assign pan-European stocks their own ID code may have helped, but require subscription to and payment for entire sets of data, in order to get the whole picture. Meanwhile, some market participants are reporting their trades – as is permitted under MiFID – to obscure web sites that are unknown to many of those seeking to get that whole European view.
Elsewhere, the MTFs’ symbology initiative also drives at the heart of a complex issue that threatens to pose an obstacle for truly pan-European trading: fungibility of securities. Without a standard symbol set, financial institutions and their suppliers are forced to adopt their own particular methodology for identifying those securities that may be traded on multiple execution venues.
The ability to access, capture and present data on interchangeable (fungible) securities in a consolidated order book is a key requirement if financial institutions are to be able to trade across multiple venues and employ sophisticated smart order routing systems to identify and execute on dispersed liquidity.
Of course, another sub-theme would appear to be an attempt by the MTFs to break the mould of monopolistic symbologies operated by major vendors like Thomson Reuters, with its Reuters Instrument Code (RIC), and Bloomberg. Through control of their respective symbologies, these suppliers exert considerable influence on the choice of data and applications within the trading and investment operations environment, making it difficult for competitors to encroach on their established client bases.
Though Thomson Reuters (as Reuters) has toyed with the idea of opening up and/or licensing access and assignation of its RICs on several occasions previously, each time it has pulled back from doing so once the commercial implications became clear. Indeed, during its evaluations of the commercial impact of switching from its Integrated Data Network (IDN) to the Bridge network five years ago, Reuters found that some 50,000 client applications were dependent on RICs to access Reuters data, a factor that contributed to Reuters’ U-turn on the issue (Market Data Insight, May 2003).
According to a spokesperson for Chi-X, the working group will be open to all European execution venues. “It’s more of a working project than a working group – a collaborative effort rather than a formalised entity,” she says. “In terms of timetable, Bats Europe is yet to go live and will be adopting the new symbology … and Chi-X will be introducing these new symbols over the coming few months.” It’s likely that Nasdaq OMX will follow suit for its pan-European marketplace.
Turquoise, the other major MTF that began operations in recent weeks, would appear to be a prime candidate for inclusion in the group; the Chi-X spokesman says existing traditional exchanges and broker-operated and independent dark pools would also be welcome to join. In a joint statement, the founding MTFs say: “With a common symbology in place, European trading participants will be able to easily consolidate market data from any trading venue – either MTF or exchange – and more effectively smart route orders.” Currently, the role of identifying fungible securities is left to the smart order routing application. Developers are left the responsibility for creating or supplying a symbology for identifying these securities.
In its recent white paper, Intelligent Liquidity Access: A New Frontier for Electronic Trading in Europe (prepared by A-Team Group, publisher of Market Data Insight), connectivity provider Fidessa emphasized the importance of a “single, flexible identifier” for fungible securities. “A clear and consistent definition of instrument fungibility is the cornerstone of any multi-venue trading platform,” it says.
For many, the default solution is to combine the applicable domestic or primary identifier – often the International Securities Identification Number (ISIN) – with the appropriate currency. Where the security matches both, then it is essentially fungible. This combination can be mapped by firms to internal security ID structures, although this is a less than elegant solution.
Previous (and ongoing) attempts to develop a common market data symbology have foundered. The Financial Information Services Division (FISD) of the Software & Information Industry Association (SIIA) has long had creation of a universal symbology on its agenda, but has hit obstacles in part due to the vested interests of major sections of its vendor- and exchange-dominated membership.
This new MTF group may have better luck, not least because it is aiming at addressing a very specific issue: liquidity fragmentation in the pan-European equities marketplace. Support by market practitioners may also play a major role: by their very nature, these new MTFs need the support of major liquidity providers, in order to stage a credible assault on the status quo of established European exchanges. Add to that the fact that Bats Trading counts among its financial backers Citi, Credit Suisse, Deutsche Bank, Getco,
JPMorgan, Lime Brokerage, Morgan Stanley, Merrill Lynch, Tradebot and Wedbush, and prospects for the group’s success appear even more rosy.