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Q&A: Sébastien Jaouen of Orange Business Services on MiFID II, Electronic Trading and Latency

We all know that regulation drives much of the innovation in electronic trading and the technology that addresses it. In Europe, the MiFID II initiative looks set to shake up the electronic world for new asset classes, and that’s going to feed through to data volumes and latency. IntelligentTradingTechnology.com asked Sébastien Jaouen, head of trading community services, Orange Business Services – Trading Solutions, for his insight into the near future.

Q: What should the world of low latency know about MiFID II?

A: Following the MiFID implementation at the end of 2007, regulators have decided to review the directive in order to further achieve its main objectives: increased competition and consumer protection.

The main impact of MiFID II for the low latency world is in the scope of the new rules.  As well as addressing the equities markets and pre-trading and trading activities, the objectives will also expand to multi-asset trading.

Q: In particular, how are OTC markets like swaps going to change?

A: Transparency is a main concern, especially if you are looking to impose a level playing field.  If the information is only known by a limited number of market participants rather than being available to everyone, it can really challenge consumer protection.

Aside from equities and the listed derivatives markets, a large number of instruments remain traded over-the-counter (OTC).  Regulators now want to tackle these grey areas, to boost transparency.

Market participants are reacting.  Inter-dealer brokers, the largest players on the swap markets have decided to open up their internal electronic trading platforms to enable all market participants to contribute their data and trade directly on the platforms.  This is a huge step in allowing more transparency on the swaps market.

Q: What do these changes mean for connectivity and latency?

A: The swaps market is becoming more transparent as it leaves a world that previously was mainly dominated by voice trading in favour of electronic methods.  By allowing direct access to market data, the market also gets more accessible and attractive for players.  We expect to see a strong interest in these newly accessible instruments in the coming years.

Market participants need reliable connectivity to access to these platforms, not only to trade but also to be able to send and receive market data.  Both market data and trading are latency sensitive.  Reliable connectivity to the market/platform becomes a key factor in the whole lifecycle.

Q: What kind of data volumes and latency profile might we expect from these newly automated markets?

A: Volumes are still relatively limited for the moment as these platforms were only recently launched.  But they are rising slowly as more participants connect on a monthly basis and benefit from these new liquidity pools.  Again, this will put more pressure on connectivity providers to offer the best latency to these venues.

Another point to mention here is geography.  Being able to access a new platform no matter where you are located is paramount.  Relying on a global partner becomes essential to be able to connect to these new liquidity pools in a timely and effective way.

Q: Beyond swaps, where do you see further markets automation driven by regulation and other dynamics?

A: The market place is extremely crowded and with margins under huge pressure, each financial institution is looking for its next opportunity.

We expect there will be some interesting changes in the foreign exchange space in the coming year.  A move to electronic trading platforms for most OTC instruments is also expected.  This will generate more volumes and therefore new sources of revenues for banks and brokers.

In a nutshell, the markets are increasingly becoming more electronic based and will offer more transparency.  However trading is only one piece of the puzzle as the challenges of clearing to complete the trading lifecycle still remain.  This is definitely an area which will be of great importance to improve market efficiency in the coming years.

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