Market surveillance might appear an unlikely candidate to be a driving force of change and a hotbed of competition, but capital markets research and advisory firm TABB Group says that MiFID’s implementation is turning surveillance, traditionally a cost centre, into a competitive edge.
According to new research published today by TABB, spending by brokers and trading venues in Europe on post-MiFID trading surveillance products will increase by a compound annual growth rate (CAGR) of 13% from 2009 to 2012, rising to €185 million in 2012. As vendor products become more widely available, says Miranda Mizen, principal at TABB and co-author with analyst Will Rhode of the new research report, “Post-MiFID Market Surveillance: New Obligation and Opportunities,” the ratio of internal versus external purchases will decline from 70% in 2009 to 53% in 2012. She adds, “Changes in market surveillance needs more closely resemble a revolution rather than an evolution,” explaining that a single stock that used to trade on three venues may now trade on as many as 15.
Traditionally, surveillance has been a requirement and a necessary cost of doing business. It belonged under the auspices of regulation and compliance and was a prerequisite to any new feature, product or system. Like quality assurance, it was a time-consuming but integral part of progress that helped protect the organisation from regulatory, commercial and reputational risk.
That changed with MiFID’s introduction in 2007. “As with trading infrastructures,” says Mizen, “surveillance systems and programmes need to be broken apart and then rebuilt. To join the dots in this new market place, you need a new pen. Changes in market structure have shifted the onus of surveillance, as individual markets may no longer have all the trading activity, brokers have clients across Europe and regulators have to learn to share.”
Today, individual investors and boards of financial institutions demand proof of the integrity of the environments in which they trade. The buy side wants proof of best execution and comfort about the risk profile of their counterparties. Brokers point to surveillance programmes as essential to sound risk management, integrity of execution and appropriate and legal conduct both towards and by their clients.
This has begun and will continue to drive demand for surveillance products, says Mizen, on different levels. First, the rapid rise in trading volumes, products and venues requires innovative functions that allow visibility so that compliance departments are not overwhelmed by alerts. Second, the unevenness of expansion and uncertainty of success have accelerated demand for affordable flexibility, cost efficiency, immediacy and extensibility.
In addition, these products are equally providing opportunities as they spill over from surveillance to analytics, making it easier to provide snapshots of best execution on demand, distribute dashboards to clients hungry for better visibility and use market replay tools to understand, educate and improve execution strategies. “This will move surveillance from a badge of compliance to a competitive edge,” says Mizen.
The 20-page report with 10 charts is available now for download by TABB Group Equities Research Alliance clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.