[ I N T E R V I E W
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J A M E S
B A U G H ]
James Baugh, head of EMEA equities market structure at Citigroup, talks to The TRADE about the impact MiFID
II has had on European market structures, the changing relationship between the buy- and sell-sides, and what
further regulatory changes may be in store.
What is your view on the way in
which market structures have
changed since the introduction of
MiFID II?
James Baugh: MiFID II has been
fairly broad in terms of its impact
on the European equity markets
despite the sell-side already having
to manage for MiFID I, especially
when you consider some of the
obligations that are now bestowed
upon the buy-side, such as unbun-
dling, meeting transparency and
best execution requirements.
In regards to execution, the
wider market impact has been
on the liquidity landscape which
has seen further fragmentation,
adding additional complexity to
the workflow. This isn’t just about
connecting to every new liquid-
ity destination but more about
understanding the impact on the
parent block when interacting with
certain types of flow and also in
knowing the client’s benchmark
to know how best to work that
business in what is a very different
liquidity environment.
Here we look at two things. One
is in regards to what we would
describe as liquidity sourcing,
understanding where we access
liquidity to find best outcomes for
our clients. The way in which that
has evolved has really been more to
do with how we outsource liquidi-
ty, that perhaps firms like ourselves
matched using broker crossing
networks pre-MiFID II. Now that
we can no longer systematically
match client-to-client business,
we have to think about how we get
that business done. There are three
sub-themes that we consider and
those include the rise of periodic
auctions, the growth in liquidity
providers - those market makers
that are registered as systematic
internalisers (SIs) - and also the
continued growth in electronic
block trading and the wider use of
conditional orders.
The other aspect that we look at
is liquidity provisioning: how to
provide clients with efficient ac-
cess to our house inventory while
facilitating access to our systematic
internaliser as a way to optimise
the amount of business we can in-
ternalise to manage market impact
and execution costs, albeit client-
to-house, rather than client-to-cli-
ent, as it was pre-MiFID II.
What we are also starting to see
is a consolidation of flow to fewer,
larger brokers and that has been
driven, in part, by some of those
obligations on the buy-side, mean-
ing that they need to simplify their
own workflows so that they can
better monitor and manage best
execution. a couple of percentage points in
terms of the overall share of mar-
ket. It's likely that the trend will
continue, however, the question is
how far can it go? If we think about
what is a relatively fluid regulatory
environment right now, it's difficult
to think too far ahead as to what
might or might not happen.
But if we take the liquidity
providers (LPs) and the market
makers, it's worth also appreciat-
ing that these firms were already
price makers in broker crossing
networks (BCN) pre-MiFID II and
therefore what we are seeing here
is a reverse of that flow, perhaps in
a much more positive way where
the buy-side has greater transpar-
ency of who they are interacting
with.
So, when we talk about the rapid
rise of the LP SIs, I would caution
against some of the regulatory
scrutiny, knowing that pre-MIFID
II these firms were already doing
a significant amount of business
within the BCNs.
How do you view the emergence
of new trading venues, such as
periodic auctions and systematic
internalisers (SIs)? How will that
pan out in future?
JB: First and foremost, we have to
appreciate that the channel shift in
liquidity has been relatively muted
so far; we are only talking about Have there been any unexpected
developments or changes to market
structure since the introduction of
MiFID II?
JB: There has been a lot of discus-
sion around some of the unin-
tended consequences of MiFID
II, particularly considering that
the key regulatory objective was
“We have to appreciate that the channel shift in
liquidity has been relatively muted so far; we are
only talking about a couple of percentage points in
terms of the overall share of market.”
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