THETRADETECH DAILY THE OFFICIAL NEWSPAPER OF TRADETECH 2018
making it near impossible to draw any firm or definitive conclusions from the available data sets.
Regulators including the UK’ s Financial Conduct Authority( FCA) are supposedly keen to dive into the details of orders executed on auctions, prompting speculation that there could be tighter restrictions on how they operate in the future.
“ With both SIs and periodic auctions, it is quite difficult to figure out what is addressable liquidity and what isn’ t,” says Tim Cave, a European market structure analyst at TABB Group.“ It’ s really up to the industry to come together and standardise how transactions
“ LIS activity doubled last year and we think block trading will continue to grow this year,” adds Rosenblatt’ s Puaar.“ However, there is generally a natural ceiling to the proportion of trading done in blocks. The increasing number of block-trading venues means it may become even harder to match large trades.”
So have volumes moved onto lit venues as MiFID II intended? It would appear not, or at least not yet anyway, and as experts have pointed out, the introduction of DVCs will likely see firms consider the once-feared SIs as a genuine alternative rather than moving volumes onto lit exchanges.
There are similarities that can be drawn
“ I don’ t think the buy-side will fully embrace external SIs until they have solid data on performance on those venues.”
NEIL BOND, HEAD OF TRADING, ARDEVORA
are reported, particularly through SIs, to provide a better understanding of where liquidity is residing. Overall, there hasn’ t been a huge shift towards lit venues which was of course the intention of MiFID II, so regulators will be watching this closely.”
Ardervora’ s Bond also raised doubts over the early buy-side adoption of SIs.“ I believe SIs have absorbed the rest of that activity and internal SIs are probably trying to get as much as possible done,” he said.“ While larger institutions test the waters with external SIs, I don’ t think the buy side will fully embrace external SIs until they have solid data on performance on those venues. They are being used, but not widely across the buy side.”
Cave adds the DVCs will see buy-side firms taking a closer look at SIs and there should be more execution data ready for analysis.“ SIs are a new way of trading for the buy-side and, as with any new venue, they want to able to analyse execution quality before utilising them properly to ensure they are offering best execution,” he says.
Teething problems Block trading and LIS venues have certainly thrived in the new, post-MiFID II world. Fidessa’ s Top of the Blocks report reveals just how far block trading has come over the past year alone, as the proportion of dark tradedas-LIS blocks reached a record 28.7 % on 12 January compared to 12 % in January last year. For the week ending 23 March, this surged again to a record 44.02 %, with no signs of slowing down. between BCNs and SIs, as BCNs were too often misunderstood and feared by market participants in the same way SIs are now. But there are other aspects to using SIs that are daunting to buy-siders; a lack of data and complicated reporting in particular, as well as a bad reputation following rumours of plans to circumnavigate MiFID II guidelines via a trading loophole.
The industry is just a few months into the new regulatory landscape and any significant depth of change will not occur overnight. Metamorphosis on such a monumental scale will always throw up issues and teething problems are to be expected. Nevertheless, a tangible shift towards lit venues is certainly not happening yet, and with a flurry of new execution venues available under MiFID II which are struggling to provide coherent and granular data, it could be argued that the regulatory regime has in some ways created greater opacity and more venues alternative to lit ones.
Questions remain as to when, or indeed if, the buy-side will fully embrace and adopt SIs as an execution venue. While periodic auctions are poised to continue growing, block trading activity will likely hit a roof at some point, leaving on-exchange as the last venue to see any tangible increase in activity. This could happen when the MiFID II RTS 27 best execution reports are made public in June. Although should that not come to pass, the industry can expect ESMA to revisit MiFID II’ s rules around trading venues to make further adjustments. Just don’ t mention MiFID III.
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