The introduction of the EU Markets in Financial Instruments Directive (MiFID) and the US Regulation National Market System (Reg NMS) could cause a 900% increase in the amount of market data being published by 2010, according to the latest TowerGroup research.
The projected growth is based on New York Stock Exchange (Nyse) trade and quote volumes.
Reg NMS and MiFID will create more sources of data and drive a greater volume of quote data from each of these sources, says TowerGroup. The two mandates will drastically change the way the global securities industry handles market data and will require institutions and trading venues to store massive amounts of data, even as the volume of trade and quote data continues to grow.
Tom Price, senior analyst in the securities and capital markets practice at TowerGroup, says discussion has focused on the fact that these regulations mandate best execution, but this misses the bigger picture.
"The ramifications may not be felt immediately, but once Reg NMS and MiFID are final, they will have forever changed the way financial services firms treat data," says Price.
Regulatory compliance will be expensive, says TowerGroup, but the challenge will lie in determining where to spend - as global market participants juggle the requirements of bandwidth, capacity, latency, and subsequent storage to support the anticipated flood of market data.
Trade reconstitution will become crucial "forensic evidence" in proving best execution and will require gathering and storing every published quote at the time of execution along with any other data points associated with the trade.
Except for some regional differences between Reg NMS and MiFID, TowerGroup says institutions can achieve compliance through an integrated strategy that encompasses both directives, although the success of this kind of strategy depends on combining consistent policies and procedures with improved infrastructure.
"Regulatory compliance will pave the way for firms to completely automate the trading process," says Price. "The winner in the hunt for liquidity will be whoever can process the data the fastest."