MAR: You know what? Change is like poetry…
…and most people absolutely hate poetry*.
This is going to be one of those “Difficult Conversations”. You know, the kind they teach you about in Business School. We’ve got to talk about some difficult things and find common ground toward a way forward. So here’s the situation:
MAR (Market Abuse Regulation) is coming in July and there’s some things about it that are going to be really, really difficult. It’s a size-able reg but I’m going to jump right to the section which is getting the most attention: MAR requires that EU commodity firms “establish and maintain effective arrangements, systems and procedures to be able to detect suspicious orders and transactions.”
It sounds innocuous enough, but before I get to all the ins and outs of actually executing this mandate, I need to put forth the centerpiece of this difficult conversation:
Some traders will be forced to change how they execute trades.
I’m also going to say that the search for the ultimate surveillance tool is foolhardy until you’ve got your data strategy thoroughly thought through .
The Devil of Surveillance is in the Details
Let’s talk about what we are up against.
- Most European companies have begun to look for some type of software solution based on the complexity of their business. These range from simple to complicated pieces of software and process. Some solutions have very cool artificial intelligence and other big data features that are a huge leap forward, technologically speaking, for both firm and industry alike.
- But there are known challenges with surveillance systems: If you ask anyone in equities surveillance their complaint is that surveillance solutions take a long time to configure and calibrate. Take equities surveillance. It’s been around for years. What worries market officers is not actual market manipulation. It’s false positives. Every time your compliance system beeps and tells you it sees suspicious activity compliance officers are obligated to investigate and potentially report. It is the proverbial boy who cried wolf.
- Can firms realistically get something up and running by July?
- But there is one issue that crowns all: Where are commodity companies going to get the data to run any surveillance solution? In other words, where exactly, do we get all of our order and trade execution data?
I’m not going to kid you. The answer to where we get all this data is nuanced and nasty enough to drive any compliance officer through the roof. So here we go:
Take this project we just completed with a pretty typical trading firm. About 1000 physical and financial trades per day across three exchanges and smattering of OTC trades.
How Do We Get Our Order & Execution Data?
Getting orders is like running a gauntlet with traps on all sides. The primary reason is that the major exchanges and FCMs are pretty new at it and there is a lot of bumps in the road. Let me give you an idea of what it looks like:
Let’s start with ICE. The ICE Private Order Feed will get you all our trader’s ICE order data. It’s pretty straightforward But, only so long as the traders are using WebIce. Yeesh, looks like our traders are using a bunch of other tools.
Got some traders using TT?
Yep, we’re going to need a connection into TT to get those orders and fold them together with the ICE POF. Totally do-able. But, it’s not quite as simple as that. You know the TT instance the traders are using? It’s hosted by the FCM. We’re going to have to wrestle with them for a while to allow you access to your own order book. This is not as easy as it sounds.
Nope, not even close. The orders are flowing fine from ICE but CME we are only seeing some from TT. Must be our CME Direct trades. Let’s get them through the drop file. Anyone know a really good VPN guy because it’s taking forever and ever to set-up what was supposed to be a simple connection to basically get a file. And what do you mean I have to pay for a 500KB connection?
Whoops, our trading operations never set up segregated session IDs. Going to have to shell out for those and wrestle a bit more with the FCM. As always, this is not as straightforward as it seems.
Cross your fingers we think we have a full footprint of CME and ICE orders.
How about OTC trades?
OK, yes over to OTC trades. It’s all physical now and we can aggregate all of the ACER XML order data from our OMPs. Wait! What do you mean the XML is different between these brokers?? OK, we will do some mapping it as the data comes in and we should be good to go.
Wait, one more thing! Lets bring in the full order book so we can get tick values so we can compare our orders to the market. Phew, at least that’s a well established integration. But, it costs how much? WOW. Wait just one second. Tick data is coming in …and there’s an ABSOLUTE TON of data. We estimate we need …..whoa, that’s a lot of storage! How soon can we start procuring servers? Geeze our server team is going to gouge our eyes out on this one.
With that done we’ve made it pretty far… except….
- We still have 3 traders using some trade execution tool that just has no way to capture orders at all.
- We still have 5 traders using a third exchange that offers absolutely no orders at all.
- Its March. We go live in July. We haven’t even started configuring our surveillance solution yet.
- The above orders & execution process only scratches the surface …For an article I had to leave so much out.
As an integration software company this is our world. We secretly nerd out on it. But I don’t think regulators really understands that as far as market surveillance data goes,this is the kind of cobble, beg, borrow and plead process we have to do to just get orders.
And, what’s a compliance officer do with the exceptions? Are we really ready to tell traders they can’t use their favorite execution platform because it is entirely “un-surveillable?” Can we shut off trading exchanges that don’t offer order data at all?
The crux of this difficult conversation is, exactly that. Off reservation traders are going to have to change how they execute and it’s just not going to be popular. But, until these execution tools and exchanges improve their order flow we’re going to have to curtail.
There is also a lot of sales pressure to “get into a system fast.” I’m sorry, but without a really well thought out data strategy there is a risk of buying a system that has nothing but partial and half broken data to analyze. That is going to result in a crushing blow of possibly report-able nonsense.
If you are trying to get your data for MAR we’d be happy to talk. It’s all do-able and we’ve learned many tricks along the way. For a July go live date including getting a surveillance system up and running we’re going to need to get moving.
OK, I’m glad we had this talk.
*Adapted from a Michael Lewis quote in “The Big Short.”