[ I N - D E P T H | M I F I D I I ]
It was a long time coming and when it finally did arrive , MiFID II did so with little fuss to match the fanfare , promoting a more transparent marketplace and better investor protection that would grow over time as both the industry and regulators adapt and evolve alongside the new rules .
The implementation of the new regulatory regime on 3 January was not widely expected to cause immediate tidal waves , particularly as the introduction of some aspects has been staggered to allow participants to fully adjust to the new trading environment . But it cannot be said that the industry has not responded to the task over the last six months .
Indeed , a variety of new terms have entered the trading lexicon and look set to stick around for some time to come as a direct result of MiFID II , meaning firms on all sides of the market spectrum deal with what has become the ‘ new normal ’ for trading .
“ We are beginning to get to a point where market participants are looking at new innovations and ways of trading ,” says Brian Schwieger , global head of equities at the London Stock Exchange . “ In some ways , the fun is coming back into the business because up until now , resources across the board have been so focused on preparing for MiFID II .”
While volumes have so far largely favoured periodic auctions and systematic internalisers ( SIs ) instead of the lit exchanges favoured by the European Securities Market Authority ( ESMA ), equities market participants are still adjusting to the new environment and there has yet to be a significant dearth in liquidity .
However , despite a relatively successful implementation of the new regulations in January – albeit with that one-year postponement
“ In some ways , the fun is coming back into the business because up until now , resources across the board have been so focused on preparing for MiFID II .”
BRIAN SCHWIEGER , GLOBAL HEAD OF EQUITIES , LONDON STOCK EXCHANGE
required by the industry to fully prepare – and the necessary adjustment by trading behaviours to the new framework , it cannot be said that the regulation has been a complete success so far considering it has only been in force for a little over half a year .
“ If a key objective was to move liquidity back into lit exchanges , at this early stage , it is questionable that that this goal has been achieved with much trading simply shifting to systematic internalisers and periodic auctions ,” says Charlotte Decuyper , European market structure analyst at Liquidnet .
Big changes The introduction of SIs in place of broker-crossing networks ( BCNs ) was of the most significant points of contention within the regime , especially how these trades are being reported and ensuring that SIs fall under the tick size regime .
“ With the bulk of SI trading going through SIs at banks and brokers , there has been some differing views about how transactions should be reported ,” says Mark Hemsley , president of Cboe Europe . “ Some are reporting their operational trades , and the question is , are they flagging them as SI or over the counter ( OTC ) transactions ?”
“ The key point is understanding how much volume is price forming as I believe the numbers reported on SI trading have in fact been vastly exaggerated in terms of what is truly addressable liquidity . The SIs and regulators are working out between them how to address those nuances and resolve some of those reporting issues , which I think will happen pretty soon .”
The issue of enforcing the tick size regime on SIs was one of the major early issues facing ESMA following the implementation of MiFID II , and after an industry consultation in February that drew conflicting opinions from participants , the regulator announced it would go ahead with its plan , stating in late March : “ ESMA also does not fully subscribe to the arguments brought forward by some stakeholders that , in consequence of the proposed amendment of RTS 1 , trading venues would be subject to a lighter regime than SIs .”
Cboe ’ s Hemsley says that it is likely that there will an update on sub tick pricing that SIs can use . “ SIs will likely have to follow the same tick size as exchanges which is good for the market and levels the playing field . However , it is important that half ticks are allowed , especially for mid-point pair transactions where there are an odd number of ticks in the spread ,” he says .
Strain on relationships While there were changes made around best execution and trade reporting , both elements that continue to throw curveballs at compliance teams across the industry , the unbundling of research payments and execution fees has arguably been the biggest shift to deal with for both the buy- and sell-side to handle , according to Northern Trust senior vice presi-
30 // TheTrade // Autumn 2018