Instinet Looks to MiFID II

Shanny Basar

Agency broker Instinet Europe believes advances in technology and changes in market structure due to new regulation will provide opportunities for smart aggregation and the creation of personalised liquidity pools.

Ben Stephens, head of business development at Instinet Europe,  the equities execution arm of Japanese bank Nomura, told Markets Media that trading experiences could become as individual as a Facebook feed or any other stream on social media.

MiFID II, the regulations covering financial markets in European Union from January, will change market structure by banning broker crossing networks, introducing new types of regulated venues and placing limits on the volume of trading in dark pools. In addition, there are new pre and post-trade transparency requirements and stricter best execution requirements, which will produce more market data.

Ben Stephens, Instinet

“Five years ago a non-bank liquidity provider could supply five foreign exchange feeds to different clients for 20 currency pairs, that has now risen to feeds with 2,000 equity instruments,” he added. “Increased processing power also allows customised pricing based on counterparty behaviour and relationships.”

Stephens continued that improvements in technology are driving the trading experience more than new  regulations.

As a result, Instinet Europe launched bilateral liquidity streaming relationships with electronic market makers Virtu and Sun Trading this summer, complementing existing connectivity to market makers, lit markets and dark pools.

Christiaan Scholtes, head of EMEA Markets at Virtu, said in a statement: “As the liquidity landscape in Europe undergoes a fundamental paradigm shift, we’re looking for intelligent ways to adapt. We see this relationship as an opportunity to transparently and efficiently provide our risk liquidity to a broader set of participants through Instinet’s high quality, neutral agency platform.”

Instinet said the relationships provide both buyside and sellside clients with aggregated liquidity and opportunities for price improvement, filling a gap between lit venues and large in scale blocks. Clients remain anonymous but the liquidity provider has Instinet as a known counterparty, and so can offer price improvement and larger size.

“Our partnerships with Sun Trading and Virtu means we can already provide private quotes in bilateral trades,” added Stephens. “They demonstrate our ability to process and compress meaningful amounts of data and offer clients personalised feeds that they can use to trade.”

He continued that Instinet has the credentials to process large amounts of data for clients due to its technology heritage, its position as a neutral agency broker and as it already helps clients aggregate dark pool trading.

Stephens added: “Our aim is to provide trading opportunities that clients cannot find anywhere else. Regional banks have contacted us to provide quotes so there may be opportunities in smaller or micro-cap stocks.”

Instinet said in a report in July, The Impacts of a New Liquidity Paradigm, that the changes under MiFID II could be the equivalent to 1986, when London’s Big Bang eliminated the role of jobbers and radically redefined the role of stockbrokers.

“The ability for a buyside client to fine-tune their liquidity options is even more important given the tougher MiFID II requirement for best execution, calling for ‘sufficient’ rather than ‘reasonable’ steps to be taken,” said the report. “An increasing range of execution options, and an expanding set of relationships required to access all of the available liquidity opportunities, places institutional clients under pressure to pro-actively manage an array of highly tailored liquidity feeds.”

Under this new market structure, an agency broker can act as a central liquidity ‘aggregator’, consolidating and managing feeds and quotes from the participating systematic internalisers, and other new venues,  as well as manage order routing across third-party brokers and SIs.

“The new dark pool caps and the melding into our algos of new venues such as SIs and periodic auction venues will be the largest trading behaviour change under MiFID II,” said Stephens. “We will add periodic auctions to our dark pool algos which will give clients new data and trading choices.”

For example Turquoise, the pan-European MTF owned by the London Stock Exchange, yesterday announced plans to launch frequent transparent auctions in the fourth quarter of this year. Turquoise Lit Auctions will be triggered when Turquoise receives matching orders from its members. Members will then have a 50 millisecond window in which to submit any further orders to the auction before the start of a further 50 millisecond randomised uncrossing period.


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