Conference Dailys TRADETech Daily 2018 | Page 29

THETRADETECH DA I LY THE OFFICIAL NEWSPAPER OF TRADETECH 2018 TRADETech Daily examines whether trading volumes have moved onto lit venues following MiFID II’s restrictions on dark trading and the rise of systematic internalisers. O ne of the fundamental objectives of MiFID II is to increase transparen- cy and move trading activity onto lit venues, but weeks into the new regime record block trading and periodic auction volumes have dominated regulatory head- lines. Large-in-scale (LIS) venues were widely tipped to the primary beneficiaries of new requirements which saw the closure of broker crossing networks (BCNs) and the rise of systematic internalisers (SIs). In the weeks leading up to the introduction of MiFID II on 3 January, industry partici- pants and experts have dissected the block trading landscape and made predictions on the migration of order flow from BCNs. One trend became clear – periodic auctions, LIS ple, saw a record month of trading volume totalling more than €6.5 billion during January, and average daily notional value (ADNV) traded reached €296 million, a mas- sive 885.3% increase compared to the fourth quarter in 2017. Dark delay and data difficulties Periodic auctions have swept up even more order flow following the introduction of the double volumes caps (DVCs) for dark pools, which were delayed just one week into the MiFID II regime until 12 March by the EU markets watchdog. The European Securities and Markets Authority (ESMA) said in a statement released on 9 January that the data received from trading venues since MiFID II “With both SIs and periodic auctions, it is quite difficult to figure out what is addressable liquidity and what isn’t.” TIM CAVE, EUROPEAN MARKET STRUCTURE ANALYST, TABB GROUP venues and finally SIs were the venues to bet on in a post-MiFID II world, not necessarily on-exchange or lit venues. In a Liquidnet member presentation in February the firm said that, at a high level at least, there hasn’t been a significant differ- ence in dark and lit activity, and lit volumes experienced no major change since 3 January. Instead, Liquidnet found that periodic auc- tion volumes had exploded, LIS activity had continued to increase and SIs even snuck in to steal a slice of the pie. Less than two weeks after MiFID II finally came into force, Neil Bond, head of trading at Ardevora, offered his insight as to where activity had migrated in those early days of the new regime. “Following the closure of BCNs, it seems periodic auctions have absorbed the ma- jority of buy-side to buy-side crossing that was initially going through those venues,” he said. Bond’s observation is clearly validated by a surge in volumes across various periodic auction venues during MiFID II’s infancy. The Cboe Periodic Auctions book, for exam- went live six days prior was insufficient and did not allow for a ‘meaningful’ and ‘compre- hensive’ calculation of the planned DVCs. “The ban on BCNs has helped to boost periodic auction volumes,” says Anish Puaar, market structure analyst for Europe at Rosen- blatt Securities. “Most periodic auctions offer broker priority which gives brokers a low-cost, transparent way of matching client orders that used to reside in BCNs.” Even this early into the new regulatory regime it has become clear that data and reporting are significant issues to address. Confusion around SI reporting requirements has skewed the data, and a large proportion of transactions that were previously reported as over-the-counter (OTC) are now being reported as SI activity. It’s the same story with periodic auctions: what percentage of transactions executed through auctions is price forming or pre-matched? As it stands, the data is simply not granu- lar enough and various different parties are coming up with their own estimates instead, Issue 1 29