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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