SI Numbers Expected To Drop

Shanny Basar

Buyside traders prefer systematic internalisers run by banks, rather than electronic liquidity providers, as new regulations covering trading in the European Union come into force.

Systematic internalisers were originally set up for equities under the MiFID regulations in 2007 for all off-venue trading in the European Union. However only nine banks became SIs and very few trades took place on the back of an SI quote as off-venue trading moved to broker crossing networks. As a result MiFID II, which goes live today, prohibits broker crossing networks and extends SIs to other asset classes, as regulators aim to capture over-the-counter trading activity, increase transparency and ensure that the internalisation of order flow does not undermine price formation on regulated trading venues.

Banks and electronic liquidity providers have registered to establish approximately 100 SIs under MiFID II according to ITG.

The agency broker surveyed more than 50 buyside institutional investors who trade European equities last month and found that 88% expect there will be fewer than 10 relevant ELP SIs in operation by the end of this year, while 42% expect there will be fewer than five. “Bank-run SIs look to be the more popular choice, with two-thirds of traders expecting to interact with bank SIs in the first quarter of his year versus fewer than 40% for ELP SIs,” added ITG.

Rebecca Healey, Liquidnet

Rebecca Healey, head of market structure, Liquidnet EMEA said in a post on LinkedIn that not all SIs will be successful as there is a trade-off between providing greater information to receive tighter pricing and incurring signalling risk and impact cost.

“With the increased focus on evidencing best execution, the requirement for deeper knowledge of trading outcomes is likely to continue to support a shift in dark trading patterns towards more transparent offerings,” she added. “It will be the venues which provide the buyside with greater control over how, where, and when to trade in the dark, which in turn enhances the level of comfort firms have in accessing dark pools, not necessarily just SIs.”

The majority, 86%, of buyside traders polled by ITG also expect to interact with block trading venues in this quarter.

MiFID II introduces double volume caps on dark pool trading. However Large In Scale (LIS) trades, above a certain size specified by the European Securities and Markets Authority, are exempt from the dark pool caps. As a result there are will be more large trades to take advantage of the waiver and ITG said block trading volumes more than doubled in 2017 ahead of the new regulations.

Cboe Europe Equities said today it has traded more than €20bn ($24bn) in notional value since the launch of its European large-in-scale block trading platform, powered by BIDS technology, in December 2016. More than 115 buyside firms and 17 sellside firms are connected to the platform.

Mark Hemsley, president of Europe for Cboe, said in a statement: “With MiFID II now in effect, we believe Cboe LIS and our Periodic Auctions book are well-poised to further benefit from the changing market dynamics that we expect will occur this year.”

Nearly all, 84%, of traders in the ITG survey expect block volumes to increase this year.

Turquoise Plato Block Discovery, the partnership between the buyside, sellside and the MTF owned by the London Stock Exchange Group, had a monthly volume record of €7.55bn matched in October 2017.

Dr. Robert Barnes, chief executive of Turquoise and global head of primary markets at the London Stock Exchange Group, said in Plato Partnership’s year in review: “MiFID II will introduce constraints around dark trading below LIS for stocks captured by the double volume caps. This will continue to drive market behaviour towards order flow above LIS and pre-trade transparent trading innovations that can serve orders below LIS.”

Dark pools and MTF periodic auctions currently make up almost 10% of total European trading according to ITG. The survey found that 61% of traders expect dark/periodic auction MTF liquidity to grow to 12% or more of total trading by the end of the first quarter. Nearly all, 82%, of traders plan to interact with dark MTFs in the first quarter while 80% plan to interact with periodic auctions.

Cboe Europe Equities set a monthly record in its periodic auction book last month, while Nasdaq Nordic also had record volume for its Auction on Demand in December 2017.

The ITG survey said opinion is split on how MiFID II will impact traders’ ability to access quality liquidity. One third, 37%, of traders expect it to become harder, 18% expect it to become easier while the remaining 45% said there will be no significant impact.

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