Editor’s Note: the following includes thoughts and insight on the World Exchange Congress from Theo Hildyard, Solutions Architect, Market Surveillance at Progress Software.
When the announcement of the first Markets in Financial Instruments Directive (known as MiFID) was made in November 2007, it was with a view to increasing competition and protecting consumers in investment services.
Despite the European Commission's best intentions with the MiFID directive, it’s interesting to note that many of the people I spoke to at the World Exchange Congress (WEC) in Instanbul, Turkey feel that - far from helping to regulate the market - MiFID has merely exacerbated market abuse.
With estimates of €13 billion a year being lost as a result of market manipulation and abuse since MiFID was first announced, the overwhelming sentiment from those I spoke to at the WEC was that the time has come to ask what is being done to reverse this decline. How can we protect the markets from such expensive manipulation, and how can it be better regulated?
One of the mooted suggestions was that a central organization could be set up to undertake surveillance of the market across different territories and venues. As it stands, surveillance can only be carried out by individual organizations looking for signs of abuse taking place within the confines of their own ecosystem. Clearly, this means that, as things stand, the opportunity to identify and address market-wide abuse through cross-market surveillance is limited. However, by establishing an independent organization to surveil the wider market, venues would be able to more effectively identify systematic areas of abuse and better regulate what takes place.
Of course, this brings its own questions, in terms of how such an organization could be run. Who would be willing to step up to establish it? Would it need to be a regulator, or somebody else? Perhaps most importantly, how would it impact individual participants, and their need to surveil what’s going on in their own back yard?
Another suggestion was to implement the use of a consolidated tape to collect and standardize pricing from the numerous venues, and allow for the sharing of information to be standardized. Of course, this information can be difficult to collect, and brings us back to the question of which organization is going to step up to own this idea.
Practically speaking, it’s clear that if nobody does step forward to define what this consolidated tape looks like, then ESMA will eventually mandate it. While everyone agrees that business, rather than ESMA itself, is better suited to lending its experience and expertise to be able to provide this, what’s the solution in the short-term?
In the absence of clear guidance, perhaps trading venues can achieve a short-term fix by embracing Complex Event Processing (CEP) technology. While barriers to cross-market surveillance remain, it would at least allow them to identify abuse in real-time. In doing so, they can reduce the risk they are exposed to until such time as an organization steps forward to solve the cross-market surveillance conundrum.