MiFID II introduces a requirement for operators of trading venues to collect and maintain considerable amounts of order data throughout the trading day. Among the new order attributes, defined in RTS 24 - Maintenance of relevant data relating to orders in financial instruments, are codes for "Client identification", "Investment decision within firm" and "Execution within firm".
To avoid sensitive data flowing through the trading system and to reduce the impact of increased latency some trading venues have declared that they will implement solutions where client and personal data is identified through ‘short codes’ at order entry. Prior to order entry or at the latest by the end of the day, members will be required to supply information describing mapping of each short code used on orders.
Currently there is no harmonization between the trading venues regarding the format and structure of new short code solutions. In addition to this there is no standardization regarding the ability to provide reconciliation for a member that is compliant with the demands from the trading venues. On the 3rd of January, 2018 this new requirement from ESMA will go live for all trading venues. The indirect impact on the members trading on all venues in Europe will be enormous and will compound the direct requirements towards the members.
The introduction of short codes at the point of order entry drives major changes in the core order management systems hosted by the trading member. Furthermore the order sent to a market must be stored, regardless of whether or not the order resulted in a corresponding transaction. Each respective member firm has the best capability to solve this challenge either internally or with consultancy help discussing the solution and setup with experts in this fields. Most member firms are directing their energy and focus towards resolving these challenges today, otherwise they run the risk of being excluded from all European markets.
The short code used at the point of order entry must have a relationship to the long code mapping already stored so that it can be sent to the trading venue, either pre- or post- population. This may not appear to be that difficult however in a complex environment with a wide variety of OMS, distributed customer databases and many market gateways, this challenge soon raises many questions and issues thus driving complexity exponentially. In addition to this it is possible a trading participant may have many partners using DMA and Sponsored Access which adds further layers of complexity and challenges into the scope. The final variable to be added is the continuous and ever more demanding regulations and subsequent challenges regarding the distribution and sharing of sensitive customer data between all parties involved.
The third major challenge is to correctly report all short code/long code mappings to every trading venue that the member participant, or it’s DMA/SA-partners, has communicated to. Again, this may appear to be a relatively straight forward task however the deadline of the 3rd of January 2018 is rapidly approaching and this, combined with a lack of existing information regarding current specifications from the more than 250 venues, means that this is a complex challenge. The European Market Operators are currently working to develop solutions that ensure that all their trading venues are compliant with ESMA’s new requirements. They do not have an obligation, nor the time and focus to find an easy and harmonized way of solving the problems that the member firms are now facing. This third major is the focus of our ELIN solution, please read more below.