The Markets in Financial Instruments Directive (Mifid) is law across Europe on 1 November, bringing major technology challenges to the investment industry.
Mifid is an EU directive that attempts to expand the investment industry through increased competition and transparency.
Investment banks, brokers and exchanges must upgrade their IT infrastructures with new storage, connectivity and routing technology if they are to meet the Mifid requirements and prosper after its implementation.
But many of the firms that will be affected by Mifid are holding back these investments as they wait for the competition to increase, according to industry experts.
David Smith, principal consultant in compliance at Atos Consulting, said spending is being deferred by many firms. "But as competition unfolds it will give rise to greater technology spending," he said.
Investment firms will have to spend money on smart-routing technology to collect orders to buy shares and distribute them based on the rules investment firms set themselves, or "best execution", as the Mifid principle is known.
This rule requires firms to link to stock exchanges in real time. They must store and be able to retrieve information to prove best execution for years after the transaction.
A survey of 98 investment firms across Europe carried out by capital markets think-tank JWG-IT, showed that companies are far from ready for Mifid. It found that 85% still had significant work to do on their best-execution policies.
Pressure on IT infrastructures
PJ Di Giammarino, chief executive at JWG-IT, said best execution puts pressure on IT infrastructures. "Financial institutions are all about data. With Mifid they will have to be able to prove, to the customer now and possibly to the regulators in the future, that what they did is what they should have done," he said.
Bob McDowall, senior analyst at TowerGroup, said he is not certain firms are completely ready to use best execution as a competitive business opportunity.
"The will is there to use it for competitive purposes, but I am not sure many of the firms are there yet," he said. "This is a mix of wait and see and playing catch up."
Mifid will also bring more competition to stock exchanges. The removal of the "concentration rule" across Europe, which states that trades should go through local exchanges, means investors will have more choice over which exchange to use.
Although this has been the case in the UK for some time, the opening up of pan-European investment trade is driving the creation of new venues by investment groups. Financial services firms are springing up to take advantage of Mifid.
Driving new business
Boat, a consortium of nine investment banks, is an example of a trade-reporting platform created to take advantage of the market liberalisation created by Mifid. Boat enables investment firms to meet their pre-trade quoting and post-trade reporting obligations.
The platform collects, collates, validates and stores trade data, and publishes it to the market in real time. It uses exchange software developed by Cinnober to do this.
Turquoise is a trading platform set up by a group of investment banks to take on the traditional exchanges. A spokesman at Turquoise said Mifid and developments in technology were both factors in its creation. "With Mifid, the regulatory environment becomes more conducive to competition, and new technologies, especially smart routing, and their downward costs are major factors."
Technology is critical to these start-ups, said McDowall. "It is the most important component in their armoury initially," he added.
He said exchange technology today is widely available that supports Mifid's encouragement of competition. "Technology levels the playing field in terms of being able to do business, but traditional exchanges have many other advantages."