27 June, 2017 // TabbFORUM
A Busy Year for New MiFID II-Compliant European Exchange Protocols
By Dave Carson, EMEA Technology Lead
Next-generation exchange protocols, originally designed to improve throughput and latency as trading speed accelerates, are now also serving as the mechanism for meeting the looming mandates of MiFID II regulations. This is leading to a very busy year of testing and migration to new market data feeds and order gateway protocols at firms trading on European exchanges and MTFs. We thought it would be instructive to document some of the important migrations that must occur over the next six months before MiFID II goes into effect.
As we all know by now, MiFID II aims to improve the functioning of European financial markets by increasing transparency of trades, promoting orderly markets, updating rules on market microstructure, ensuring competition, and strengthening risk controls. While a wide variety of financial market participants are affected, our focus here is on the market data and order gateway interfaces in use at exchanges and MTFs. Firms trading on those venues must adapt to these changes if they are to continue to receive direct market data feeds and submit orders.
To help standardize changes in post-trade data required for MiFID II compliance, the FIX Trading Community has released a new version of its Market Model Typology (MMT) project that efficiently fulfills the trade flagging requirements raised in MiFID II RTS 1 and RTS 2. As an example, Redline’s InRush Feed Handler data model strictly adheres to MMT to provide a consistent view across markets. The Community continues its work to broaden MMT implementation, such as in defining OTC trading reporting rules. (source: www.fixtradingcommunity.org/pg/group-types/mmt)
Let’s look first at Euronext’s new Optiq Market Data Gateway. Optiq went into pre-production testing a week ago for cash markets (in July for derivative markets). Optiq replaces the legacy Universal Trading Platform (UTP). It increases throughput with more predictable latency, ensures compliance with MiFID II regulations, and harmonizes their cash and derivative messaging model. MiFID II compliance is addressed with disaggregation of market data channels for affordability and new MMT-compliant order and trade fields for transparency. (source: www.euronext.com/nl/regulation/mifid-2/timeline )
This month the London Stock Exchange decommissioned its legacy MITCH interface and is now fully transitioned to its Group Ticker Plant (GTP). GTP features for MiFID II compliance include new data types, updated trade and transaction fields, indicative quote information, and message timestamps adhering to required accuracy levels. (source: www.lseg.com/resources/mifid-ii )
BATS Europe has made protocol changes to its FIX, BOE, and PITCH interfaces to conform to MiFID II requirements, and its 2017 Q2 release supporting these changes will be going live in production on 14 July. (source: http://cdn.batstrading.com/resources/participant_resources/BCE-GuidanceNote-Q22017Release_Final.pdf, pages 4-5)
In Frankfurt, Deutsche Börse is migrating its Xetra cash markets venue (XETR) to the modern T7 trading architecture in June in preparation for the start of trading in equities and ETFs in early July. T7 has been in production use on its derivatives exchange, Eurex, for more than three years, and a migration to Release 5.0 is underway this month. T7 and the CEF Core data feed will be enhanced later this year for compliance to MiFID II requirements. (source: www.xetra.com/xetra-en/technology/implementation-news )
Other examples of exchange upgrades driven by MiFID II include Nasdaq OMX Nordic moving to GCF 3.5 and Vienna Stock Exchange moving to T7, both in November. SIX Swiss Exchange is moving to SMR7 in October for compliance to FMIA (Swiss) and MiFID II (EU) regulations. And the list goes on ...
MiFID II requires ongoing testing of electronic trading algorithms and platforms with up-to-date recorded market data to help ensure the integrity of markets. Firms need testing tools to play back canned data through new versions of their Feed Handlers, whether developed in-house or procured from a third-party vendor, and to simulate responses of exchanges to orders generated by their trading algorithms and their execution gateways. The ability to automatically perform regression and stress testing on new software versions is now not only an internal software QA requirement but also an external regulatory requirement.
Many capabilities are needed for firms to meet their MiFID II compliance requirements. They need to be able to move to new MiFID-compliant interfaces to trading venues, such as those listed above, in a fast and efficient manner. They need to be able to demonstrate best execution by constructing a user-specified Best Bid & Offer showing available prices across multiple venues. They need monitoring tools and services to proactively monitor market data feeds and order executions, sending alerts that can trigger kill switches to protect the functioning of markets. And they need a way to record and persist packet captures to enable a time-accurate reconstruction of the market for algorithm back-testing, forensic analysis of market events, and post-trade analytics.
Order Entry and Transparent Reporting
Participants must also source liquidity for best price across an increasingly fragmented lit and dark trading landscape. This in turn has led to the creation of block trading venues such as BATS LIS, Turquoise Plato, and Euronext Block. Aside from the need for additional market access interfaces, the need to consume normalized trade data and to publish timely and reliable trade reports is similarly large.
In summary, MiFID II is causing a range of rapid changes in European equity and derivative trading. Vendors such as Redline Trading Solutions are assisting with this challenge by abstracting the complexity inherent in trading systems and providing a technology framework for staying current, testing thoroughly, and remaining compliant. With additional asset classes such as FX and Fixed Income embracing electronic trading and falling under the embrace of MiFID II, clearly the work to meet regulatory requirements will continue for the foreseeable future.