TESS OTF is a Software-as-a-Service (SaaS), built upon Cinnober’s TRADExpress Trading System and the market leading Scila Surveillance trade monitoring solution, and designed to meet the requirements of MiFID II, the new regulatory framework for the European financial market.
It comprises a fully hosted and managed OTF system with exchange quality including a broad range of functionality add-ons to shape and extend the service. The capacity in terms of transaction volumes and throughput can easily be scaled up on demand, allowing customers to grow as business grows.
The service pricing is based on usage in terms of capacity level, asset classes and functions. The subscription fee covers both software license and services, and there are no major startup costs. Time to market is usually only a matter of weeks.
Tess is a full-service concept: the standard service (green) offers a hosted and managed TRADExpress Trading System on a subscription basis, in this specific case an OTF adapted version, with a wide range of preconfigured add-ons (blue).
Overview of MiFID II
The original MiFID regulatory framework came into force in 2007 and restructured the European financial markets. The effects have been lower transaction costs, tighter spreads, faster trading and removal of the concentration rule for national exchanges.
In October 2011 the European Commission proposed MiFID II, a revision driven by new business models, technical developments and the financial crisis. The Commission has proposed a 2013 target for the MiFID II directive.
MiFID classified three types of trading venues: Regulated Markets (RM), Multilateral Trading Facilities (MTF) and Systematic Internalisers (SI).
MiFID II adds previously unregulated Organized Trading Facilities (OTF) to the MiFID framework to include evolving business models such as Broker Crossing Networks (BCN). OTFs are intended to be similar in scope to a swap execution facility, defined by the Dodd-Frank Act in the U.S. The goal of SEFs and OTFs is to bring transparency and structure to OTC derivatives trading.
MiFID II focuses on four areas of interest for OTFs: market structure, transparency, high-frequency trading and reporting.
Market Structure
- Eligible derivatives are to be traded on regulated trading venues only.
- The OTF has discretion over how a transaction will be executed.
- The OTF has a best execution obligation and may choose to route a transaction to another firm or platform for execution.
- The OTF may also refuse access to clients.
- An OTFs may not trade against the operator’s own proprietary capital.
- A market operator is required to stress-test and encode so-called circuit breakers into their systems that can stop trading in an instrument or an entire market.
Transparency
- Total pre- and post-transparency in equities trading.
- Expanding pre- and post-trade transparency to non-equity products; the detailed transparency provisions need to be defined for each asset class or instrument.
- Organized trading venues would be required to unbundle pre- and post-trade data, for example, for users only interested in post-trade data.
High-Frequency Trading
- Ensure that high frequency traders executing a significant volume of trades in an instrument would be obliged to continuously provide liquidity.
- Orders to rest on an order book for a minimum period of time before they can be withdrawn.
- Impose an order to executed transaction ratio by imposing incremental penalties on cancelled orders and setting up minimum tick sizes.
Reporting
- Reinforce the oversight of positions in derivatives, in particular commodity derivatives.
- Extend scope of transaction reporting to regulators for all financial instruments.
- Extend reporting obligations also to orders and require market operators to store order data in a harmonized way.
- Set up a system of position reporting of commodities derivatives contracts by categories of traders.
- Require trading venues to publish information on execution quality.
TRADExpress Trading System
The TRADExpress Trading System is easily configured to meet the market structure requirements of an Organized Trading Facility.
The trading system supports circuit breakers and price bands — a built-in functionality to control that the prices are not moving too fast in any direction. The price band function is very flexible and can be configured in many ways to fit many market models.
TRADExpress Trading System has an optional best execution function for routing orders to other venues.
The trading system also allows for control of the transparency per product, including unbundling of pre- and post-trade information.
For further information regarding TRADExpress Trading System in itself, please click here.
Scila Surveillance
Scila Surveillance is an efficient tool for the regulatory supervision of an Organized Trading Facility.
Scila supports high-frequency trading supervision, including tracking quoting obligations, order handling and measuring order to trade ratios.
The system also handles all reporting requirements including position oversight, reports to regulators, and execution quality. Scila also fulfills the requirement for storing order data.
For further information regarding Scila Surveillance in itself, please click here.
