EFIS 2010: Regulation Holds Data Challenges for Entire Industry

A swathe of new transparency regulations sweeping the US and Europe threatens to affect all participants in the financial markets, from sell-side and buy-side firms to exchanges and vendors, and even the regulators themselves, who may soon have access to so much data that they won't know what to do with it, said panelists at last week's event.

Panelists generally agreed that the market will see an increase in data volumes as a result of broader regulatory transparency requirements. Although Jean-Pierre Gottdiener, manager of Paris-based consultancy Lucidine Conseil, said technical hurdles to achieving greater transparency would be relatively easy to overcome, Christine Sheeka, product manager at MTS Data, questioned whether clear commercial drivers exist for content generated as a result of new transparency requirements.

Dark liquidity pools and broker crossing networks are one set of trading venues that will be required to publish more information in real time, said Karel Lannoo, chief executive of the European Capital Markets Institute. The issue may be attracting a disproportionate amount of attention, however, since only a relatively small share of overall equity trading is executed on those platforms, said David Berry, sourcing executive at UBS and a representative of UK-based data association Ipug.

Reported Data Avalanche

But regulators should be careful what they wish for, as demanding too much transparency could make it more difficult to make sense of the ensuing avalanche of reported data, warned Meredith Gibson, director and counsel at Citigroup in London. "We don't even know for certain what caused the flash crash... how will giving the regulator more data guarantee that we will be in a better position?" she said.

And while both regulators and market operators are likely to have access to more data, the cost of that data is also a concern, leading some panelists to suggest that data vendors should also be subject to some regulatory supervision. "Exchanges are regulated. Investment banks are regulated. What's in between? The market data vendors and ratings agencies that are not regulated," allowing vendors with quasi-monopolistic positions to wield unchallenged price increases, Berry said.

In addition to monitoring and potentially regulating the way that vendors price their data products and services, some supervision may be required to pare back complex commercial agreements and resolve issues over intellectual property rights in the market data industry. A recent survey by French data user group Cossiom found that 91 percent of respondents thought data providers - including vendors and exchanges - were not sufficiently clear in communicating their commercial terms.

Regulators themselves also need to communicate more clearly if they are to gain support and adoption, Gottdiener said, and should clearly define their objectives for any new regulations, and whether their aim is to improve investor protection, heighten market surveillance or tackle institutions that are "too big to fail" - each of which may be worthy goals but would require different approaches.