“ There are aspects of the MiFID II regulation that I see as an attempt to move more trade onto the lit markets , but some orders and stocks really don ’ t benefit from trading on lit venues . I believe we will see an increase in broker intermediated block trading .” David Miller , head of EMEA trading and Invesco UK , “ Shaking up markets ”, The Buy-side Perspectives , issue 3
Referring back to the Citigroup article comment about MiFID II prohibiting BCNs , this is something the buy side generally think is unhelpful but merely are forced to accept . European exchanges will be the main beneficiary of this regulation getting back business which they lost subsequent to the first iteration of MiFID . The buy side in Asia and USA have not shown any desire to adapt similar rules in their regions .
The European buy side has not seen any evidence of exchange driven auctions and block services being able to replace dark pools yet . Some buy side are already trying to figure out how they will be able to put mechanisms in place to identify the risk of trading over dark pool caps in MiFID II . While there is a more exchange friendly attitude among continental European buyside , the majority of buy side think more block volumes will be executed through a mix of fragmented algorithmic orders and new exchange driven services when MiFID II is in place . Some buy side are even more pessimistic and think that some liquidity will also disappear as an unintended consequence of such regulation .
“ There is no evidence whatsoever that dark pools harm price formation , if anything it is the opposite . From data we have , dark pools actually improve price formation , especially on large orders .”
“ There is a common assumption that when the cap is implemented , all that volume that cannot be traded on the dark pools will automatically shift to the lit market . In my opinion , this will not happen . That type of liquidity will simply disappear .” Gianluca Minieri , global head of trading , Pioneer Investments , “ Master of all trades ”, The Buy-side Perspectives , issue 2
Testing OMS providers ' new automated handling processes for
IoIs , the buy-side Fix Protocol working group also had progress in their attempt standardising IoIs . Additionally the buyside in Hong Kong and London have tried to standardise IoIs to encourage a stronger ethical culture . At the end of the day , the buy-side report , sell-side counterparties need to be disciplined commercially if they don ' t follow agreed practices in order to enforce changed behaviour .
“ We ’ ve tried many times to incentivise brokers to offer larger sizes , but often we ’ ve found the marker moves against us . It ’ s hard to incentivise them to offer blocks . On the exchange side , the lit markets are OK because of all the passive trading . The exchanges own the auctions so it ’ s doubtful they will push for many changes .” Anthony Godonis , head of trading - Americas , Aberdeen Asset Management , “ Less is more ?”, The Buy-side Perspectives , issue 5
The US based buy side are seriously concerned that the trending inflow to passive funds and ETFs combined with less corporations finding the incentive going public may commoditise and take the value out of the equity market . It is already hard to generate more than single digit Alpha in the US equities market unless one makes a bet during market volatility . This trend will drive further automation with algorithms and fragmenting orders and the end result will be that the access to block liquidity will become limited and more expensive . There is a pessimistic outlook how this trend amplified by restricting regulations will affect the survival of capital market participants who are specialised in block and high touch services . The same buy side are contemplating what innovation or what form of changed investor appetite is required in order to change the gloomy outlook .
“ There are too many algos . At the US ATF in the summer , when one broker asked what kind of algos they could provide to suit the buy side ’ s needs , one asset manager responded : ‘ Stop giving us algos ”’ It ’ s a race to zero for rates , and I think we ’ re pretty close to that already .” Patrick Connors , head of outsourced trading . Weeden Prime Services , “ America at the crossroads ”, The Buy-side Perspectives , issue 6
18 www . buysideintel . com December 2016