THETRADETECH DAILY in-depth
THE OFFICIAL NEWSPAPER OF TRADETECH 2018
TRADING VENUES
Market complexity growing alongside large-in-scale trading and periodic auctions
KEYNOTE DISCUSSION PANEL FINDS THAT WHILE LARGE-IN-SCALE TRADING AND PERIODIC AUCTION ACTIVITY IS ON THE RISE , SO TOO IS MARKET COMPLEXITY .
The increased use of large-in-scale ( LIS ) trading platforms and periodic auction books are creating further market complexity and fragmentation , according to a cross-industry panel .
Since the introduction of the new directive at the start of the year there has been a significant shift of trading activity towards LIS and periodic auction venues , while the implementation of the systematic internaliser ( SI ) regime has added further complexity and fragmentation to the European markets .
JP Morgan Asset Management ’ s European head of equity trading , Neil Joseph , said the firm has seen a number of shifts within the trading channels it uses as the effects of MiFID II and the new venues have come into play .
“ This time last year , the percentage of our orders book that went through the high-touch , the cash desk channels versus the electronic , they were slightly in favour of electronic and that continued throughout the year ,” he said .
“ That started the shift towards the end of last year into this year to the extent that they were level and , if anything , slightly favoured cash desk . There are a number of things influencing this , but as soon as the dark pool caps came in to place in March , cash desks decreased by 30 % and algos increased by 30 %.”
For operators of LIS or periodic auction venues , such as Liquidnet and ITG who were represented on the panel by Mark Pumfrey and Rob Boardman , the expectation is that new LIS platforms will soon come to market . Boardman pointed out that while Europe lags behind the North American market in terms of platforms and volumes traded , this trend won ’ t last for long .
Christoph Hock , head of multi-asset trading at Union Investment , said that although the changes to the market landscape have created more complexity , it is an “ optimal environment for trading ” nonetheless .
“ We want to make sure that we deliver the best possible execution service for our investors ,” said Hock .
“ We want to lower the implicit trading cost and market impact . We want to make sure that we have as little as possible information leakage . With a variety of different types of trading , the very explicit way we can address the barriers of SIs for certain types of orders , we have the very best choice we can make to optimise our trading outcome .”
“ All the trends we have discussed are clearly in our favour and it ’ s also important from a regulator ’ s perspective to understand that the ecosystem we have right now is a complex one – as a buy-side firm you have to ask the right questions to the individual providers – but from our perspective a perfectly functioning ecosystem , which hopefully will remain sustainable .”
However , not all panellists were so enthusiastic about the current market landscape . Kjelle Blom , COO of Dutch electronic market maker Optiver said the company made a specific decision not to start an SI function due to the existing levels of market complexity and the plethora of new venues .
“ We said that we don ’ t want to start an SI , we don ’ t see that further fragmentation is going to benefit the market . How can it be more efficient for the whole market if it is fragmented over 200 + marketplaces . I don ’ t see that whatsoever fundamentally ,” said Blom .
“ We are a fundamental believer in the lit exchange , but if everything shifts away from lit markets to SIs or alternatives , the comparison with the lit market becomes better and better , because lit markets are getting worse with less liquidity . It becomes a self-fulfilling prophecy .”
Ultimately , there is no “ one size fits all ” approach said ITG ’ s Boardman and the risk of further complexity in the markets is one that each company will have to approach differently .
“ I think the market can take that , with education and people having statistical analysis , they can understand venues ,” he added .
“ We like to use periodic auctions , liquidity is more variable than some other markets , but overall I think they are a good compliment what LIS does when you have genuine liquidity meeting in larger size . The two together are a good combination .”
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