[ I N T E R V I E W
|
J A M E S
B A U G H ]
[ I N T E R V I E W
What have been the positive chang-
es brought about by regulatory
change?
JB: One of the key objectives of reg-
ulatory change was to encourage
greater transparency and there has
been a benefit from the new re-
60 // TheTrade // Summer 2019
J A M E S
B A U G H ]
“The concern is that
the market has become
more fragmented
and complex, and
invariably, with that
costs increase, which is
always going to be an
issue.”
receive, you have to look at a quant
fund very differently versus an
institutional client, in terms of the
types of liquidity they want to in-
teract with and how we make sure
that we are providing access to that
type of liquidity. This will season
and develop over time, and that's
where coming together with your
underlying clients and understand-
ing their needs is very important.
This isn't a one-size-fits-all oppor-
tunity and will be a slower burn,
in terms of how banks and SIs, like
Citi, will look to differentiate over
time.
How will the role of the broker
develop in future as the market
structure continues to evolve?
JB: Given the increasing complex-
ity, the role of the broker will be-
come more relevant and important
in helping the buyside to source
liquidity. We are very proactive
in terms of how we are looking to
develop our business and allo-
cate resources to take advantage
of structural changes as a way to
differentiate ourselves in a market
that has become fairly commodi-
tised.
What needs to play out is that
consolidation of liquidity; it is
something that is well-discussed,
but actually we haven't neces-
sarily seen some of those brokers
as negatively impacted as some
might have you believe. But we are
definitely seeing a consolidation
of flow driven by the underlying
client being able to declutter and
manage what is a very different set
of regulatory obligations.
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porting regime and that has been
useful in driving some conver-
sations in other products, like
exchange traded funds (ETFs).
The other key positive develop-
ment here is the buy-side and sell-
side coming together, the buy-side
becoming much more focused on
broker performance and meeting
their best execution obligations.
That is encouraging the sell-side to
sharpen their focus and make sure
they are providing best outcomes,
access to unique liquidity and that
they are able to work together on
optimising trading performance.
That can only be to the benefit of
the end investor.
On the buy-side the unbundling
of research and execution pay-
ments has been positive in terms
of allowing the heads of dealing on
the buy-side desk to concentrate
more on best execution, rather
than having to cut cheques.
There are, however, still many
challenges left. The concern is
that the market has become more
fragmented and complex, and
invariably, with that costs increase,
which is always going to be an
issue when trying to provide an
efficient service to the end investor.
I sometimes think that gets over-
looked by the regulator.
How do you view any further reg-
ulatory change or amendments to
MiFID II playing out?
JB: We don’t anticipate a massive
sea change in the near future, but
there are some fairly significant
developments that we may see and
have to be ready for. One is the
impact of the public tick regime on
both lit venues, more specifically
periodic auctions, and on SIs. As
we understand it, towards the
end of this year or early next year,
SIs are going to have to adhere to
the public tick regime in all sizes,
which means SIs will be signifi-
cantly limited in their ability to
price improve unless that busi-
ness is above large-in-scale LIS,
Similarly, if you are no longer able
to match mid-price in periodic
auctions, and given the majority of
business is done below LIS using
peg-to-mid-order-types, we have
to start thinking about the impact
this might have on the liquidity
landscape and how to get that type
of business executed.
The frustration for the market
is that this is not just focusing on
mid-price or price improvement
per se, this is more about being
able to match intra-tick where
there are an odd number of ticks in
the spread, so you can still match
at mid-price but only if there is
an even number in the spread. It
does seem a little bit nonsensical
trying to implement these sorts of
changes that could have a fairly
significant impact in being able to
trade at fair value.
Thinking about the SIs, we think
the LPs may suffer if they are not
able to offer price improvement
unless they evolve their models.
For bank SIs it is slightly different
because price improvement itself is
not the determining factor in terms
of how we get business done, but it
is going to lead to certain changes
to the liquidity dynamics that we
need to cater for. That is something
we need to think about in the rela-
tively near term.
The other area of interest is
around the market-on-close
business, where we have seen
liquidity very much concentrated
on the close. The numbers will tell
you that some of the more liquid
names, not just on LSE but on oth-
er primary markets, see 30%-35%
of the daily volume traded on the
close. We are now engaged with a
number of alternative platforms
which are looking at ways in
which they can provide solutions
or ways to get that market-on-
close business done away from the
primary. Again, this could see some
structural changes in the relatively
short term. However, as an indus-
try we need to be thoughtful about
how we approach this, because
what you invariably end up doing
here is diluting the actual reference
price itself. It’s also worth noting
that a number of institutions are
also looking at benchmarking away
from the close which in in itself
is an interesting move and one to
watch.
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