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logic in our routing process.
When we are trading aggres-
sively, we are only looking at where
it is likely we will get the smallest
amount of price impact, and we see quite
big differences between the market maker
destinations, which as mentioned we also com-
pare with lit markets. A small element of price
improvement from a market maker won’t be enough
to tempt us, we really care about the impact that could
manifest from that interaction on an ex-post basis.
Jonathan Finney: I would emphasise Ben’s point there.
Not all brokers are the same and not all market makers
are the same, so we see very different types of evalu-
ation and results. What Jefferies is doing in collating
and analysing data and evolving behaviour based
on the results of this analysis, represents one end
of the SI evaluation spectrum. With regards to how
this landscape has evolved over the past year, overall
volume does not appear to have changed dramati-
cally. However, the composition of liquidity sources
certainly has changed. To that point, SIs are not the
only alternative source of liquidity but they represent
the single greatest opportunity for evaluating equity
market makers. Given the bilateral nature of the SI,
ironically this has achieved the transparency that
MiFID II was aiming for. Matthew at Liontrust, via
Ben at Jefferies, knows that he is trading with Citadel
Securities and he can evaluate us on our merits.
I think people have been surprised at how slow
ELP SI growth has been but we are definitely seeing
the buy- and sell-side becoming more comfortable
interacting with market makers as they are able to
access more data. I would point out that there are only
four market makers currently reporting their monthly
data to Rosenblatt Securities and TABB Group and
having this data available supports the evaluation pro-
cess. Market makers are very different. For example,
Citadel Securities specialises in risk-warehousing po-
sitions, larger quote sizes, benign market impact and a
diverse security universe. Having a robust evaluation
framework is important in assessing these factors.
MM: On the issue of transparency, if we had decid-
ed not to interact with SIs, then I would actually be
trading with them on lit exchanges anyway, possibly at
worse prices, smaller size and potentially with a larger
market impact. That is up for debate, but when I inter-
act bilaterally, I know exactly who I am trading against
so that I can hold that venue to account.
72 // TheTrade // Winter 2018
HM: What have
you found to be
the most important
factors when evaluating
ELP SIs?
MM: Firstly, I need to decide if
their model makes fundamental
sense and if it is adding liquidity
that would be beneficial for me to
interact with. I then look at price,
size and market impact - those
three factors are key. For the buy-
side, I think market impact and size
has become a lot more important
this year. I’m not looking for a
twentieth of a tick price improve-
ment, I’d rather have larger size and
lower market impact. It’s strange to
say it as a trader who is addicted to
getting the best price - but the best
price is not always best execution
for me. If I can get good liquidity
and not impact the market, then
I am usually a happy bunny. The
importance of those two factors has
definitely increased over the past
couple of years for the buy side in
my opinion. Fill rates are another
factor to be aware of. I hear of SI fill
rates between around 95-99%, but
what happens when you don’t trade
against them? That’s harder for the
buy-side to monitor. One thing is
for sure, with the proliferation of
execution venues that we have ex-