Why Packet Capture Matters For MiFID II Compliance

Blog entry

Firms are catching on to the importance of packet capture for the real-time trade surveillance that MiFID II will require when it takes effect at the start of 2018, according to trading technology and regulation experts who spoke in a webinar hosted by Intelligent Trading Technology on June 27.

The definition of network packet capture is taking all the information on a firm’s communication network and saving that information for further analysis, explains Dan Joe Barry, vice president of positioning and chief evangelist at Napatech, the sponsor of the webinar.

Webinar Recording: Trade Surveillance and data capture for MiFID II compliance

“These networks operate at high speed and there is a lot to look at,” he said. “The challenge is being able to get that information without losing any of the bits and bytes that are there. You’re saving a copy of everything going on in real time. That’s essential because that will give you the basis to do real-time surveillance, do analysis after the fact and let other applications get in there and do the analysis they need to do.”

Responding to an informal poll question asked during the webinar, 57% of audience members said regulatory concerns increased their interest in network packet capture.

Featured Download: Poll results on Trade Surveillance and data capture for MiFID II compliance from our recent webinar audience

Packet capture can also address MiFID II and similar regulatory concerns by solving the problem of data being stored in unrelated silos, according to Clive Posselt, commercial director at Instrumentix.

“Large organisations’ typical business approach to this is frequent technology changes, operating in silos,” he said. “Bringing together connectivity specialists, infrastructure teams, trading technologists, traders and business managers with the data they all require to comply with regulation is extremely difficult, especially when rebuilding the lifecycle of a transaction. … Organisations are looking for opportunity to use the regulation to drive business processes and enhance business processing.”

Monitoring, tracking and reporting non-linear transaction data in real-time, from different technology silos makes it difficult to get high granularity, added Posselt. Coupling packet capture with more accurate time-stamping makes it possible to manage relevant data at greater scale, he said.

Demonstrating best execution

Firms’ legal obligation for regulatory reporting entails demonstrating that they got the best possible results for their clients, explained William Garner, partner at the Charles Russell Speechlys law firm.

“Where you have voice broking, how do you gather enough information to demonstrate that?” he said. “What’s vital is gathering information in relation to particular orders or trades, and gathering evidence to demonstrate that you have the best possible result in the circumstances. Doing that electronically isn’t strictly required but certainly helps.”

The importance of packet capture will also be magnified by MiFID II provisions banning the bundling of research into sell-side services to clients, according to Posselt. “Those players need to focus even more on the quality of their performance of an execution now,” he said. “In packet capture, everyone concerned will be making sure their systems operate at optimal performance to provide the best possible results for their customers, because those clients will vote with their feet. … The ability to have accurate data, process it in real-time and historically re-create market events, use that data for testing algorithms, smart order-routers and troubleshooting will be absolutely invaluable.”

Capability for investigating anomalies

While MiFID II is not precisely prescriptive about how trading anomalies should be investigated, it does emphasise real-time and post-trade monitoring, according to Garner. “MiFID II is about looking at all the circumstances surrounding a trade and how you got there,” he said. “The expectation is you’re doing this electronically and have manual means to do so also. It’s a massive widening of scope and mandate.”

In other poll questions asked of the webinar audience, 62% said their firms were not prepared to investigate trading anomalies in real-time, and 40% said their firms do not have plans for deploying surveillance and capture technology to keep up with coming regulatory changes.

The greater scope Garner described, covering all the circumstances leading up to a trade, means using packet capture to pull in more data than ever before, from more places than ever before.

“As you look across pre-trade, execution and post-trade, and across assets, instruments and venues, you must duplicate these systems in all the places you need to monitor,” said Napatech’s Barry. “These are expensive and can be a very demanding proposition.” Napatech captures all “raw information” not tied to particular applications, to address this greater scale and scope more efficiently.

“It doesn’t necessarily have to be a one-to-one relationship between data capture points and the software doing the data harvesting,” Barry added. “You can also have different types of software accessing the same data capture info, so you can easily add different software for different types of harvesting. … There’s a lot of flexibility built into this model so as the volumes increase, you have a way to scale each of these layers independently without having to duplicate very expensive boxes throughout your network.”