Still miffed by MiFID?

I stole the title for this post from a panel discussion at Complinet's Compliance Conference in London today.

Judging by the number of people in the room (it was half full) they may not be that miffed about MiFID, or perhaps as most of the audience were risk and compliance officers, having to comply with non-prescriptive regulations is par for course.

Admittedly I walked in halfway through the debate, but judging by questions asked by the audience, it would appear that the Financial Service Authority's (FSA) principles-based approach to regulation, including MiFID, is causing consternation amongst risk and compliance officers, who would prefer a more prescriptive rules-based approach.

One compliance consultant chipped said that if firms went out and said what they think the rules mean (as they pertain to MiFID, then that would create a "stake in the ground," which is the safe way to develop compliance in a principles-based world.

Deborah Sabalot, a regulatory consultant, begged to differ however. She reminded the gathered risk, compliance and audit staff that the great thing about MiFID is that it was not non-prescriptive - in other words it gave firms the flexibility to design their own systems instead of being locked into something that was not of their making.

Still it didn't sound like that was what compliance officers wanted to hear. It seemed to be more a case of give us a set of rules we need to comply with and we can work with that, rather than making it up as we go along.

That may be the view of MiFID across the board, however, in the front office where the trading that MiFID regulates is executed, some firms clearly see MiFID as an opportunity to set their own benchmarks particularly around aspects of the regulation such as best execution.

However, for those that prefer the certainty of a prescriptive rules-based world, some form of best practice appears to be emerging, albeit slowly. Although it may take 12 to 18 months before firms' application of best execution under MiFID beds down, one spokesperson from UBS investment bank said any firm that takes a simplistic approach to execution by executing all of its trades on a single venue, are likely to find themselves under regulatory scrutiny.

That is pretty much a 'no brainer,' but other investment bankers raised concerns about additional taping requirements from CESR and the FSA and the extension of MiFID to commodities.

Lyndon Nelson, head of risk at the FSA, conceded it had been a difficult time for the organisation, particularly in view of the Northern Rock affair which it has received considerable flack over. Non-believers of a principles-based approach to regulation are likely to say that Northern Rock highlights the pitfalls of a principles-based approach to regulation.

However, Nelson said the FSA intended to stick to its non-prescriptive guns, albeit gaining some valuable lessons along the way from the Northern Rock Affair, and where requested, he said the FSA would provide market guidance by publishing more information gleaned from its risk assessment of firms, which could then be used by their peers to benchmark themselves against.

Fragmentation is not a dirty word

In the run up to the implementation of MiFID there was considerable 'umming' and 'aahing' about the impact the relaxation of the 'concentration rule' would have on the proliferation of trading venues and what that would mean in terms of fragmenting liquidity in Europe.

Those that were keen to see the status quo preserved in terms of liquidity residing largely with the national exchanges, painted a confusing picture of multiple trading venues springing up and the challenges of having to connect to all of these venues in order to demonstrate best execution.

Well it seems that debate has been quashed and smart order routing systems are helping "re-aggregate" liquidity.

"Fragmentation is good," said George Andreadis, head of AES, liquidity strategy, Europe, Credit Suisse at Finexpo in London. He then went on to cite a long list of reasons as to why it was good; less cost, lower latency trading, and attracting more liquidity into this space.

While Chi-X Europe may have been the only game in town, with its smarter, faster, cheaper model, Andreadis highlighted a whole host of planned MTFs looming on the horizon, including SmartPool, scheduled to launch in Q2 2008, Project Turquoise, and US "dark liquidity pools" such as BATS Trading and Pipeline, which are contemplating whether to launch this side of the pond.

It appears to be a very crowded and fragmented trading landscape emerging in Europe, mirroring what has already occurred in the US. Yet, Andreadis said that smart order routing technologies made it easier to determine where liquidity resided in 'dark pools'.

His mantra seemed to be that dark liquidity pools and MTFs were here to stay and that traders looking to demonstrate best execution ignored them at their peril. But the key to success in a market where liquidity is fragmented is the smartness of your order routing systems. "There is dumb order routing, smart order routing and very smart order routing," joked Andreadis.

Project Turquoise gives it the hard sell

There was standing room only in the auditorium at the annual Finexpo event in London for the session on Project Turquoise presented by the MTF's CEO Eli Lederman.

After much fanfare and very little substance since the group of seven investment banks announced Project Turquoise back in 2006, Lederman seemed eager to dispel the notion that Turquoise was the mythical concoction of a bunch of investment bankers, rattling their sabres in the hope that the London Stock Exchange and others would reduce trading prices.

Well Project Turquoise has still not gone live, although Lederman was adamant that preparations for the launch date in September 2008 were well underway and that he was confident Turquoise would attract liquidity from day one. "We will have a lot of members, it is going to attract liquidity," Lederman kept repeating over and over.

And if that is not enough to convince those sceptics who are still doubtful as to whether Turquoise will get off the ground, Lederman was eager to stress that it had secured office premises. "We don't have marble steps or vaulted ceilings, but this is a modern exchange," he said.

Project Turquoise has chosen Swedish technology provider Cinnober (they also built Project Boat)to build its trading platform and Progress Apama is providing the CEP engine for the MTF's market surveillance system. But Lederman was short on the details regarding the trading platform. All he would say is that it will be an "integrated transparent order book with a dark pool."

It seems that the launch date for Project Turquoise may also be a moving target, as Lederman said that it was not focused on the date alone and that it was keen to implement a trading platform that was not a "monolithic purpose built system."

Yet, despite Lederman's efforts to reassure the market that Project Turquoise is "moving full steam ahead," anyone who has observed the Project Turquoise "showboat" for the past couple of years will probably be inclined to say, the proof is in the pudding. And after talking it up so much, almost to the point of evangelizing, Lederman better hope the pudding is worth eating.

Clients likely to challenge 'best execution'

As the 1 November MiFID deadline is almost upon us, my inbox is being inundated with vendors' last minute words of wisdom regarding the much talked about Markets in Financial Instruments Directive.

One has to marvel at the PR strategies of some companies - bombard journalists with as many emails as possible, even if it is the same information that they were propagating about MiFID a few months back. Let's repackage it and hope no one notices, a bit like some of the so-called 'MiFID ready' solutions out there.

What surprises me though is that for a regulation that is lacking in "prescriptive" detail, vendors seem to know more about what firms need to comply with MiFID than firms do themselves. Is there a danger of firms installing all this whiz bang technology, only to find they did not need half of it?

Having said that Atos Origin's survey of the market suggests that firms have actually spent 20% to 25% less on MiFID than they initially intended and have not implemented smart order routing technologies, as suggested, because they are still unsure that liquidity will be as fragmented as some have suggested.

Vendors are eager to dispel the perception that they are flooding the market with technology which is simply a repackaging of existing solutions with a MiFID label slapped on it.

Some of them are even forming alliances (The Open MiFID Alliance comprising Allen Systems Group and vendors like Sun Microsystems, SAS and Gissing)where they purport to have put aside their "single-vendor" approaches and opted for a more "synergistic" approach.

I have to say though I am sceptical of some vendors trying to cash in on MiFID and the confusion that still reigns in the marketplace. But it appears no amount of "best-of-breed" technology is going to prevent firms from being fined for non-compliance with MiFID.

Well at least that is the expectation of firms surveyed by Thomson IFR which indicated that all firms expect fines for non-compliance as early as Q1 of next year, and 90% expect more fines every following quarter.

Despite all the rhetoric about "best execution" and what it means and solutions for addressing it, almost 70% of firms surveyed expect the first client to challenge their “best execution” in the first quarter of next year. Firms are not even confident about their own MiFID implementations, let alone the technology underpinning it.

Despite all the consultant-speak about MiFID being an opportunity to differentiate, it appears a number of firms are throwing technology at the problem and hoping it satisfies the regulators, without carefully considering what their strategy should be in a post-MiFID environment.

Project Turquoise gets its act together, or does it?

Well it seems after much speculation that it would not get off the ground, Project Turquoise, the multi-lateral trading facility announced by seven leading investment banks, has appointed a CEO and technology provider.

There were rumours that Project Turquoise may buy PLUS Markets, a London-based quote-driven electronic trading platform based on OMX technology in a reverse takeover. But after that deal fell through, it selected Cinnober Financial Technology, a Swedish company which also provides the technology for BOAT, the pre- and post-trade market data consortium, as its technology provider.

It has also finally appointed a CEO, Morgan Stanley managing director Eli Lederman. But in an interview with Reuters, Lederman said Project Turquoise's launch would be pushed back from November this year to next summer, giving NYSE Euronext, BNP Paribas and HSBC time to launch its SmartPool for trading so-called "dark" liquidity pools anonymously.*

The delayed launch of Project Turquoise also continues to stoke the rumour mill that it may still not manage to get off the ground.

A shorter time to market would have been preferable if Project Turquoise was to finally silence its critics and start competing with the likes of Chi-X, which is already capturing significant market share in trading of some major blue chip European stocks.

But with other MTFs gradually coming on line, it is unclear how long Chi-X will enjoy first mover advantage and what trading models or technologies are likely to gain the upper hand in the battle for liquidity.

It is reminiscent of the battle between American ECNs at the onset of the millennium, but look what happened to them. They consolidated and eventually got bought by the exchanges they competed with.

Are Chi-X, Project Turquoise and SmartPool destined for the same fate?

*PS For any of you who have ever wondered why liquidity pools are often referred to as being 'dark'. Well apparently, according to one knowledgeable insider, they are 'dark' because when you switch the lights on, there is nobody inside of them.

A PLUS for Project Turquoise

A week or two couldn't go by without some more news surrounding MiFID. And it seems that the latest is a revival in Project Turquoise's flagging fortunes. You know Project Turquoise, the multi-lateral trading facility announced by seven leading investment banks that has yet to get off the ground?

Well according to a report in Financial News, Project Turquoise looks like it may finally have 'lift off' with the announcement that it had moved to buy PLUS Markets, a London-based quote-driven electronic trading platform which trades more than 1,000 shares of largely small and mid cap stocks.

The deal has yet to be confirmed by either side but it would certainly give Project Turquoise the hand-up it needs as it still has not settled on a technology platform and has had well publicised difficulties finding a CEO.

Interestingly, PLUS Markets is installing a new trading platform, supplied by the Nordic Exchange Group, OMX, who Project Turquoise were also looking to purchase technology from. PLUS Markets new trading platform will support its "enlarged trading services offering under MiFID" and extend its share coverage to UK and EU liquid shares and some 7,500 securities.

Berlin's stock exchange looks to Equiduct

While Project Turquoise may still be looking for a CEO (well they were the last time we checked), the "pan-European exchange," Equiduct is looking to shore up market share by getting into bed with Börse Berlin.

Börse Berlin announced this week that it had taken a majority stake in Easdaq, which trades as Equiduct. Equiduct revived the old Easdaq trading platform in response to the removal of the 'concentration rule' under the Markets in Financial Instruments Directive (MiFID), which effectively means trading of equities on the Continent is no longer confined to national exchanges.

Under MiFID, exchanges like Börse Berlin are tipped to be part of a dying breed as supposedly faster and cheaper multilateral trading facilities, ECNs and alternative trading venues emerge post-MiFID to try and steal market share from 'dinosaur' exchanges. However, as we reported in the latest issue of Financial-i, few contenders other than Equiduct, Chi-X and Project Turquoise (which has yet to find a CEO) have thrown their hat into the ring.

According to the PR blurb the deal between Börse Berlin and Equiduct will provide their customers with "unrivalled access to trading in a broad category of European financial instruments." As to what this precisely means has yet to be revealed but Equiduct believes it has the "state-of-the-art" trading system and Börse Berlin has the "broadest range of securities" and experience in secondary exchange trading.

MiFID highlights lack of good practice in outsourcing

Some time back I remember hearing PJ DiGiammarino of the JWG-IT Working Group mention that outsourcing contracts were likely to be impacted by the Markets in Financial Instruments Directive (MiFID).

Then we never heard another whisper about it in a lot of the high level debates about MiFID which tended to focus on best execution, pre- and post-trade reporting and client classification. All worthy subjects, but it appears now that outsourcing and MiFID are finally in the spotlight with a survey by law firm, Field Fisher Waterhouse, revealing that most financial services organisations’ outsourcing agreements still fail to comply with MiFID.

How can that be so? Well Field Fisher Waterhouse says that the main points of failure are that 40% of firms do not have an up-to-date exit management plan in place with their service provider; 36% do not have their regulatory team review its contracts; 33% do not have a service level agreement in place with every service provider; 32% do not regularly test service provider’s disaster recovery; if an outsourcing provider fails to meet regulatory standards, 31% do not have the right to terminate the agreement; and more than 30% of outsourcing agreements do not require the provider to regularly test back up facilities.


These are some pretty glaring oversights, when you consider that irrespective of MiFID and with the buy-side outsourcing more than just non-core back office processes to providers, they do not even bother to question or test whether that provider is able to keep the show on the road if and when a disaster strikes.

Field Fisher Waterhouse technology partner Simon Briskman had this to say to firms nervously scratching their heads wondering how to put this right before the 1 November MiFID deadline:

“In order to achieve the deadline, firms need to engage their suppliers in negotiations now. Many companies have assumed that the outsourcing rules under MiFID are no more than an extension of the current rules and reflect good practice. To some extent this is true and our survey suggests that good practice is often not met in financial services outsourcing.”

Firms criticise regulators for lack of guidance

As the November deadline for the Markets in Financial Instruments Directive (MiFID) looms ever closer, sell-side firms are praying for a miracle: that national regulators will provide them with more guidance and support.

I remember some weeks back citing PJ DiGiammarino, CEO of the MiFID think tank, JWG-IT, who told firms at one of its many workshops that as MiFID is a "principles-based" regulation, firms should not rely on the regulators to provide them with much guidance when it comes to implementing MiFID.

Yet, MiFID Readiness findings from a year-long survey of 300 buy and sell-side firms conducted by SunGard and TradeTech, indicate that more than half of respondents felt national regulators were either “bad” (32%) or “very bad” (19%) in helping them prepare for MiFID.

In the UK, the Financial Services Authority (FSA) prides itself on its principles-based approach to regulation, and has tried to move away from a prescriptive approach, which has caused consternation in other markets, namely the US, where regulators were lambasted for taking a too prescriptive approach to regulations such as Sarbanes-Oxley.

But according to the survey findings, only 54% of firms believed that a principles-based approach was the best approach when it comes to MiFID, with the remaining respondents stating that it “makes it difficult to understand exactly what requirements the FSA desires, adding to the compliance task”.

Yet, despite their dissatisfaction with the lack of guidance from regulators, it does not appear to have prevented 53% of firms from declaring their preparations for MiFID to be “ahead” or “right-on-track”, compared with only 34% of firms surveyed in September 2006.

The survey findings appear to highlight some anomalies in the market. Firms would be quick to criticize regulators for taking a too prescriptive approach to regulations like MiFID, yet on the other hand they seem to desire some hand-holding. It appears that the regulators are damned if they do and damned if they don't and those firms that require hand holding or guidance are unlikely to recognise the opportunities MiFID presents to launch new initiatives and "strategic reforms".

It is worth noting that if all sell-side firms required guidance on MiFID from the regulators, then Project Turquoise and Boat may never have existed.

More banks may join Project Turquoise

So much for sabre rattling. The prospect of multilateral trading facilities setting up in opposition to the national exchanges is not just a bunch of the world's leading investment banks making a lot of noise in order to get the national exchange monopolies to drop their trading costs.

When Project Turquoise, the MTF announced by seven leading investment banks to challenge the monopoly on equity trading by the national exchanges, was first announced, some suggested it was merely a ploy by the investment banks to get the stock exchanges to reduce their trading costs. Once the exchanges had dropped their tariffs, it would disappear into thin air.

Well some of the exchanges are already reviewing their tariffs and having announced the appointment of EuroCCP (European Central Counterparty), a subsidiary of the DTCC, as its clearing agent, Project Turquoise, appears to be a goer. According to a Financial News report, Société Générale and BNP Paribas may also be joining Project Turquoise.

All Project Turquoise has to do now is choose a trading platform (believed to be a toss up between the Nordic Exchange Group OMX's technology and Instinet's Chi-X), appoint a CEO, attract sufficient liquidity and Bob's your uncle.

MiFID - It's as easy as 123

Last week I managed to muster up the energy to attend yet another event on MiFID (Markets in Financial Instruments Directive). With the November deadline for MiFID's implementation looming, everyone seems eager to jump aboard the MiFID 'gravy train' as last minute preparations grind into gear.

Last week's event, which was hosted by the MiFID think tank, JWG-IT,had the interesting working title of, "MiFID 123 Go," which could be misinterpreted given that the 70 or so people that turned up for the event were probably hoping to hear something along the lines of,'MiFID, it's as easy as 123."

The 123 was in fact a reference to how many days remaining till the November live date, and given that MiFID is what the industry terms a "principles-based" regulation, PJ DiGiammarino, CEO of JWG-IT, informed the gathered 'hordes' that they could not necessarily rely on the regulators to provide them with much guidance (no surprises there then), and that it would take three to four years before the MiFID transition was completed.

"Regulators are not going to comment in any great detail on what firms are going to do," Di Giammarino stated. "Firms may want a benchmark on best execution, but it is not going to happen."

With that in mind, Di Giammarino kicked the evening off on a 'light' note telling firms how they could "stay out of jail," pointing to a recent example of a major US sell-side firm that was fined $8 million for "failure of price transparency".

DiGiammarino joked that at least with Sarbanes-Oxley, another piece of controversial regulation,it was only the CFO that could go to jail if financial and accounting practices were not compliant. However, with MiFID it is not just one person that could be in the firing line.

It all started to sound like a game of monopoly. 'Do not pass go, go straight to jail,' but perhaps that is an indication of how real MiFID has suddenly become for a number of firms and countries that its seems are ill-prepared and equipped to cope with the all-encompassing MiFID regulation.

Seventy-five percent of EU member countries did not make the 31 January deadline for transposing MiFID into national law, and European Commissioner for Internal Market and Services, Charlie McCreevy has threatened stragglers with "infringement" proceedings.

"US firms are pretty far up the curve and are forcing the buy side along with them," said DiGiammarino. Yet, with different EU member states transposing to MiFID at different times (Sweden in August, Netherlands in November and Spain after November), it could be a potential recipe for disaster.

According to PJ, any big market [like the Netherlands] that waits till the end to transpose, risks creating a "hybrid" environment, which in the event of a bear market, could result in a very "fragmented Europe." He cited the example of Sweden, which provides transaction reporting support for the rest of the Nordic countries. If it does not make the August 2007 transposition date, then there will be repercussions for the wider market.

The MiFID debacle

I have managed to avoid writing anything about MiFID for the last few weeks, but I am forced to put pen to paper in light of recent speculation surrounding CESR's recommendations for best execution under MiFID, and an overwhelming perception that as far as regulation goes, MiFID has been a debacle from day one.

Bearing in mind that certain aspects of the regulation itself continue to suffer from a lack of regulatory clarity and detail, and the fear that some national regulators, particularly in those countries that will not transpose to MiFID on time, will lend a different interpretation to MiFID guidelines, it only serves to fuel my belief that the transition to MiFID will be anything but smooth.

With only three countries (including the UK) successfully transposing MiFID into national law by the 31 January deadline, how can regulators deem MiFID's implementation anything but a debacle of major proportions?

To add to their woes, SunGard and TradeTech have just released MiFID readiness survey findings which indicate that only 13% of financial services firms are confident that they are on track to meet new MiFID regulations. More than 60% of firms indicated that their preparations still required some work, which is hardly surprising.

Forty six percent of those surveyed by SunGard and TradeTech expressed concerns that their own national regulators would "add further complexity" to MiFID through the imposition of national laws and additional guidance.

Furthermore, whilst some clarity may have emerged surrounding best execution requirements under MiFID, rumour has is that the Committee of European Securities Regulators' (CESR) final recommendations on supervisory treatment of best execution under MiFID, are not in accordance with those of the UK's Financial Services Authority (FSA).

Apparently the UK is perceived to be way ahead of other European countries based on the government's acceptance of Paul Myners' recommendations for institutional investment decision making, and the belief is that it will take the rest of Europe a long time to catch up.

Furthermore, the mind can only boggle at the plethora of pre-trade reporting initiatives that may emerge post-MiFID and the implications for firms looking to consolidate all this data.

Marcus Hooper, who is the author of various white papers on MiFID published by Equiduct, says "few comprehensive solutions have appeared" with respect to the issue of managing increased fragmentation of pre-trade information under MiFID.

Hooper anticipates that firm’s sources of pre-trade information will "change significantly" under MiFID to encompass the existence of multiple systematic internalisers, who he says are not obligated to use identical
information distribution systems, increased multilateral trading facilities and firms with more than one secondary market listing.

The resulting connectivity diagram looks anything but streamlined and simplistic and Hooper says firms have one of two options; they can either find a way to
consolidate pre-trade information, or restrict information to a smaller number of "information delivery mechanisms", which may not be so desirable when it comes to demonstrating "superior execution".

Hooper's latest White Paper entitled: "Pre-trade information and the advantages of consolidated data" can be downloaded from Equiduct's web site.

MiFID - Hit the ground running

Not a week goes by where there is not some news on MiFID. Today appears to be no exception. With eight months to go until the official launch date for MiFID, suddenly all the experts are crawling out of the woodwork..

One such expert is Marcus Hooper who has penned a white paper sponsored by Equiduct on firms' best execution requirements under MiFID. Apparently Hooper has trawled through reams of MiFID Level 1 and 2 documentation to try and make sense of 'best execution' requirements, one of the most controversial least understood aspects of the legislation. The white paper includes example scenarios to explain how best execution is expected to work in real-life trading situations.

"The reality of today's situation is that many firms are still confused about the most fundamental aspects of best execution, despite the fact that they will all have to implement systems, design business processes and comply with the new rules from November," says Hooper.

The white paper is one of six Equiduct is sponsoring in the run-up to MiFID. According to Bob Fuller, CEO, Equiduct, it is time for firms to hit the ground running. "If organisations are to make a success of MiFID they have got to move beyond opinion and actually determine what to do now to make sure their businesses are ready when the new rules become law on November 1st 2007."

The white paper on best execution will be available free for download from Equiduct's web site from Monday, 5 March.

The war of the MiFID

Heavy with flu I forced myself out of my codeine haze to digest the latest news on, you guessed it, MiFID.You may be thinking I have swallowed one to many cold and flu capsules, as I am about to launch into another rave about the Market in Financial Instruments Directive.

Sometimes it does feel like groundhog day here at FinancialTech Insider but perhaps with good reason. PJ DiGiammarino and his team at JWG-IT, the think tank working with buy- and sell-side firms to make sense of MiFID, has gleaned from the 25 workshops it has held over the last few months with 30 financial institutions, 100 (only 100, you say?) MiFID decisions that firms need to make fairly soon before the day of transposition to MiFID in November.

Based on 150 days of collaborative research amongst the 30 firms that attended its workshops over a 12 month period, JWG-IT has identified the "known unknowns" of MiFID, which it colourfully equates with the 15th century's War of the Roses because of the loosely connected "fiefdoms" within Europe all vying for control over the evolving "common market."

JWG-IT's full report entitled, "MiFID: The roadmap to implementation," is somewhat of a 'Hitchiker's Guide to the Galaxy,' as it not only highlights where the current gaps exist in knowledge and preparation; best execution, trade and transaction reporting, MiFID's treatment of outsourcing, record keeping and customer data management; but it also provides reference implementation plans and frameworks.

And the aim of all this; well to put it bluntly, with less than 200 working days left until MiFID becomes law, it is a not so gentle reminder that firms need to pull their finger out of their proverbial ... They say it is time for action even on the 'known unknowns' (when someone has defined the known knowns of MiFID - the only known perhaps being that MiFID is going to happen - please let us know.)

David Seacombe a director of JWG-IT had this cautionary note for firms:

"Testing of new processes should start within the next two months but it will be very difficult to meet the required timetable, because many small firms still have no access to agreed architectures."

To download a free copy of the report go to www.jwg-it.eu and look under the MiFID docs section.

Just in time for MiFID

Just in time for MiFID and perhaps just in time for those sell-side firms that are contemplating setting up alternative execution venues to rival the exchanges, the London Stock Exchange (LSE) has finally announced what it plans to offer firms around the Markets in Financial Instruments Directive (MiFID).

Sell-side investment banks under the guise of Project Turquoise have threatened to set up a multilateral trading facility offering faster and cheaper execution of trades than the LSE. Also Equiduct, which is based on the old EASDAQ platform, has announced its plans to establish a pan-European exchange in response to MiFID.

The banks behind Project Turquoise have been accused by sceptics of "sabre rattling", and we may soon establish whether that is the case or not with the LSE dangling a rather 'attractive' carrot in the faces of the disgruntled sell-side firms with its latest announcement, which promises "new market leading technology, an enhanced suite of trading services" and, wait for it, "an attractive new tariff structure."


According to Computing, the LSE has been undergoing somewhat of an IT overhaul, implementing a "real-time" dashboard so LSE staff can better respond to customer enquiries. Apparently it has also implemented a new information reporting system, presumably in response to the pre- and post-trade reporting requirements under MiFID, and the piece de resistance, its new supposedly speedier trading platform, TradeElect.

In terms of pre-trade reporting, the LSE will extend its existing market making quoting facilities to encompass all EU securities, and on the post-trade side, it vaguely refers to enhancements, although with investment firms complaining about how much it costs to report trades to the exchange, it is questionable whether the LSE's efforts will be enough to prevent investment banks like Merrill and Citi going ahead with their alternative trade reporting system, Project Boat (where do investment banks come up with these names?)

Will the LSE's rather belated and vague MiFID announcement be enough to stop the sabre rattling of investment banks? It is anyone's guess, but me thinks it would be foolish for the investment banks, who have made a big deal about exchange tariffs to back down now before the Day of the M {MiFID} has even arrived.After all a little competition is always healthy, they say.

MiFID where art thou?

I am becoming increasingly sceptical of the IT vendors that are crawling out of the woodwork as the deadline for transposition to the Markets in Financial Instruments Directive looms.

As I reported a couple of weeks ago from Finexpo, even MiFID thought leaders like JWG-IT and MiFID Connect believe a number of key questions around MiFID still need to be clarified, not least the most fundamental component of the regulation, what constitutes best execution?

That hasn't prevented vendors from jumping on the MiFID bandwagon. The latest one is IT consultancy Fintecs which has launched a visual software aid, MiFIDMap Workbench, a heat mapping tool developed specifically to show compliance officers how MiFID is likely to impact their own trading processes and to what extent their business processes are compliant.

The idea behind the tool is to help companies in their planning and testing for MiFID compliance in the run-up to the November deadline, enabling companies to compare their own internal data against details of the MiFID Directives.

Anything that can help companies prepare for the minefield that is MiFID is not an unwelcome addition. However, the industry cannot afford to lull itself into a false sense of security that MiFID compliance is as straightforward as implementing a piece of software. And whilst MiFIDMap may be a helpful monitoring tool for compliance officers, unlike previous change events such as Y2K, MiFID entails changes across the business and a number of these changes are open to regulatory interpretation.

If all else fails, one can always turn to the latest tome penned by Chris Skinner, chairman of think tank Balatro Ltd. The book entitled,The future of investing in Europe's markets after MiFID, is published by Wiley.

Yes, it may be difficult to contemplate that MiFID has inspired a book, which is unlikely to knock Zadie Smith off the bestseller list any time soon. However, for those buy- and sell-side firms embroiled in MiFID and anyone interested in finding out how it will change the investment landscape in Europe, Skinner's tome provides a comprehensive overview of the regulation, how it will work, what impact it will have and the technology implications, with chapters contributed by leading industry thought leaders like MiFID Connect, Accenture, the European Commission and the MiFID Joint Working Group.

'All singin' all dancin' solutions

All it takes is an all-encompassing regulation like MiFID for consultants and vendors with 'MiFID-ready' solutions to come crawling out of the woodwork. That was the case on Wednesday at Finexpo in London where a multitude of vendors were touting the latest and greatest solution to help firms comply with MiFID.

Microsoft announced its "Mix and Match" MiFID solutions suite comprising eight different technology solutions developed in conjunction with IT partners (Aleri Labs, BearingPoint, C.O.S., Debug Software Tailoring, Fintecs, Gissing Software, HCL, HP, Progress Apama, Qumas, Rapid Addition, Singularity, SunGard, SuperDerivatives, TAP Solutions and Xenomorph).

Microsoft's MiFID solutions suite aims to help firms address planning and testing, client classification, best execution, reporting, market connectivity, reference data and trade history, systematic internalisation and systems integration.

Similarly, GoldenGate Software was showcasing how its data management platform, "quickly and easily" addresses requirements for transactional data integration, consolidation, publishing and reporting under MiFID. Sound familiar?

One major software vendor even said to me, "It's [MiFID] great for us." Apart from a few top tier investment banks that must be rubbing their hands with glee and the league of consultants being paid considerable sums to help firms get to grips with MiFID, and we must not forget the vendors hoping to cash in on the 'compliance showboat', they must be among the minority thinking, 'Bring MiFID on.'

Yet, with only nine months to go before MiFID becomes law, haven't the vendors left their run a little too late? Most of the top tier firms' preparations are arguably well underway, smaller mid-sized firms are probably scratching their heads wondering if they should build, buy, outsource or sell up altogether.

While it may be tempting to think that compliance with MiFID is as easy as melding together a couple off-the-shelf solutions, and 'hey presto,' unfortunately it is not going to be as simple as that.

No one can say with any certainty that the vendor solutions being touted today are actually what the market is looking for given that there is still considerable uncertainty and confusion, even amongst Europe's myriad securities regulators, as to how MiFID will finally play out. "There is no 'all-singin' all-dancin' solution," for MiFID said one industry thought leader, and few vendors appear to be talking about the CRM and Know Your Customer aspects of MiFID, which was highlighted by various industry working groups from day one.

Details around best execution under MiFID are still unclear. "There is no definition of best execution," says Dr Giles Nelson, director of technology, Progress Software, which has incorporated the complex event processing and business activity monitoring components of its Apama platform within Microsoft's MiFID solution suite to help firms monitor best execution. "It [best execution] will require providing sufficient visibility to the end customer about how their best execution policy is being met, which means firms need to be able to gather that information and store it persistently," he says.

But are any firms, except perhaps for the top tier investment banks that are going to be clear winners from MiFID, making IT investment decisions when there is insufficient clarity around some of the fundamental aspects of MiFID? PJ DiGiammarino, CEO, JWG-IT, says when it comes to MiFID, most firms' back offices remain a "Bermuda Triangle," with the operational, technology and legal/compliance silos unaligned.

No one knows for certain how many execution venues firms will need to monitor, let alone integrate with. Will the exchanges consolidate? Perhaps. "Consolidation [amongst exchanges] in Europe didn't happen in 1999," says Jim Gollan, chairman, virt-x, referring to Deutsche Bourse's original failed bid for the LSE. And even if it happens this time round, will it be good for the industry?

Gollan says the "paradox" of exchange consolidation is that, on the one hand, more competition means less monopolisation of the business by national exchanges. On the other hand, any form of consolidation as we have witnessed in recent weeks with the wrangling between Nasdaq and the LSE, is more likely to be shareholder driven. "There will be slim pickings for users as a result of exchange consolidation," Gollan said at Finexpo on Wednesday. "It may result in less competition and constrain exchanges from making pricing cuts."

There is still considerable speculation in the market as to whether Project Turquoise is a clear statement of intent or just an exercise in "sabre rattling" by the major investment banks in an effort to drive execution prices on the exchanges down. But if Project Turquoise gets off the ground, Gollan says the banks behind it need to be careful that they don't end up erasing any cost savings through high market impact costs caused by liquidity fragmentation.

Alice in Wonderland

The 'Day of the MiFID' may be looming, but there is still considerable uncertainty about the final shape of the regulation, particularly in terms of what constitutes 'best execution' and how many member states and firms will be ready for "transposition" to MiFID from November this year.

At Finexpo in London on Wednesday, Anthony Belchambers, chairman, Futures and Options Association and MiFID Connect,said that "Alice in Wonderland" views existed in the marketplace about firms' and member states' ability to comply with MiFID.

The general perception is that three of four European member states including the UK and France, will be ready for transposition to MiFID by November. However, Belchambers believes that member states will be reluctant to face the umbrage of the European Commission for not meeting the deadline, although he adds, it is unlikely that any action taken by the Commission will end up in court. "Most member states will be careful about taking enforcement proceedings," he says.

Once MiFID comes into effect from November, Investment Services Directive (ISD was the predecessor to MiFID) passports will be switched off. But what will happen in those member states that have not transposed to MiFID by the November deadline, Belchambers asks? Whilst an ISD passport covers a number of areas included under MiFID,there are aspects unique to MiFID which will not be covered by an ISD passport.

MiFID think tanks like JWG-IT, which are helping firms' navigate the murky waters of MiFID, have said that firms and member states' preparations for MiFID are not be helped by CESR (Committee of European Securities Regulators) missing five consultation deadlines for issuing its recommendations on what constitutes best execution under MiFID. "The 'known unknowns' are not going away," JWG-IT writes in its latest newsletter.

Although the major sell-side firms with strong algorithmic trading capabilities believe they already provide best execution of equity trades, there is still uncertainty as to how the regulators will treat the best execution requirement under MiFID. Will different member states say different things about it? Will best execution apply to every product in every market or should it only apply to the plain vanilla markets where it is easier to benchmark price?

EASDAQ makes a comeback

This is an important postscript to my rant earlier this week on the emergence of a new pan-European exchange Equiduct.

Equiduct, is a new offering spearheaded by Bob Fuller, ex-Dresdner and the Joint Working Group on the IT implications of MiFID. Due to go live in the second quarter of next year, the Belgian-regulated electronic platform will provide pre- and post-trade services in accordance with MiFID guidelines. It aims to be a single point of connectivity European-wide for investment banks that operate as 'systematic internalisers', small exchanges or banks that want to establish their own MiFID compliant trading facilities, but don't want to make the upfront investment.

In my earlier post I mentioned that Equiduct will be based on the technology platform used by NASDAQ Europe, formerly EASDAQ. Last year EASDAQ sold the rights to its trading platform to NASDAQ in North America. Now it appears it is rising from the ashes in the guise of Equiduct.

This comment from Dr Jos B. Peeters, president of EASDAQ suggests that Equiduct is EASDAQ's latest attempt at reviving its pan-European platform (all be it an upgraded version) in response to MiFID. "We are delighted that Bob has accepted to spearhead our Equiduct initiative," said Dr Peters. "He brings a vast experience with trading infrastructure and the implications of MiFID to the table."

A new 'pan-European exchange' - Is it what the regulators ordered?

Hot off the presses. A rival pan-European exchange has emerged challenging the dominance of national exchanges in securities trading in a post-MiFID world.

As the November 2007 deadline for MiFID implementation looms, it appears that investment firms are tired of letting the exchanges have it all their own way (in the UK investment firms and alternative trading venues are required to report all trades, including off-exchange trades to the London Stock Exchange, a privilege they pay for handsomely.

Some market players, tired of waiting for European exchanges to put aside their national and political differences, have taken the matter into their own hands by establishing a rival platform that will directly compete with Europe's national exchanges.

“MiFID is intended to promote cost effective pan-European trading, not trading in isolated national exchanges," says Bob Fuller, the newly appointed CEO of Equiduct, which aims to provide investment banks and smaller exchanges with a single point of connectivity for trading equities cross-border. Fuller, as you may know, has been outspoken about the market implications of MiFID as a former director of IT Strategy at Dresdner Kleinwort and former co-chair of the MiFID Joint Working Group IT Sub Group.

It appears Fuller and others are adamant that post-MiFID, trading volumes will not automatically flow to the existing national exchanges. In a clear riposte to the major European exchanges currently mired in ongoing consolidation negotiations, Fuller says Equiduct's objective is to achieve a consolidated Europe by connecting not buying everything.

Equiduct bills itself as a truly "pan-European exchange", the idea being that instead of having to connect to all 28 European exchanges or different exchanges to trade Polish, Czech and French securities, brokers can use Equiduct as a single point of connectivity. Equiduct will initially focus on trading 'liquid' shares as defined by the European Commission.

In the run-up to MiFID, there was talk of the major investment firms, particularly those that intended to be 'systematic internalisers' clubbing together to build alternative trading platforms or execution venues, which is pretty much what has happened in the US market.

There is still a chance this may happen. As Richard Balarkas, co-chair of the Global Steering Committee for the FIX Protocol, and managing director, head of Equity Trading Services, Credit Suisse, points out, MiFID is likely to result in liquidity fragmentation in Europe, similar to what has happened in the US.

However, Equiduct is pinning its hopes on the fact that not all investment firms or multilateral trading venues will want to bear the costs of MiFID compliance themselves and will therefore use its platform to provide services such as pre- and post-trade transparency or best execution. In other words, good old 'white labelling'.

Due to go live in the second quarter next year, subject to regulatory approval and customer prepardness, Equiduct's objective is to not only steal the limelight from Europe's stock exchanges, which let's face it, are fully immersed in national and shareholder politics. According to Equiduct, trading equities post-MiFID is all about low-cost and low-latency (less than 10 millisecond turnaround time for accessing pools of liquidity, to be exact).

Interestingly, the platform Equiduct is using to provide pre- and post-trade transparency and best execution for liquid European equities is an upgraded version of the exchange technology platform that was used by NASDAQ Deutschland and NASDAQ Europe, formerly EASDAQ, the troubled pan-European technology exchange which met its demise. Equiduct no doubt will be hoping that it has better success than EASDAQ or NASDAQ Europe in attracting much needed liquidity.