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liquidity for small and micro-cap stocks .
I understand the Financial Conduct Authority ( FCA ) in the UK is considering rolling back the unbundling rules for small and micro-cap stocks , and the European Commission has already decided to do this albeit using a different market cap threshold , but the horse is already out of the barn . It is unlikely to be practical for firms to reintroduce this kind of fee back into contracts with clients . These costs are permanent .
“ With reduced access to dark pools , internalisation is a natural replacement .”
AS : Why is the equities market becoming increasingly internalised ? LC : I think there are going to be two drivers to internalised order flow . First , it helps the buy-side trader achieve best execution . There is constant pressure to find different ways to trade at lower costs and internalisation is just one of those mechanisms where you can avoid high exchange fees and leaking information to too many market makers .
Understanding how an internalisation process works and how our orders will interact with the internaliser at a broker is easier to understand than what happens to an order when it is exposed to an exchange , including who sees it . With reduced access to dark pools , internalisation is a natural replacement .
The second is cost pressures for brokers . As the cost of operating a broker-dealer increases , brokers are incentivised to find more profitable ways to operate . There are a lot of drivers impacting costs including the constant rise in the cost of data , regulatory complexity and the residual costs of Brexit . Investing in internalisation makes sense to me because the broker can improve the outcome for their clients and positively impact their cost basis . Necessity is the mother of innovation .
AS : What are the benefits of using a systematic internaliser ? LC : Mid-point pricing is an obvious benefit . Saving half the bid-ask spread on a trade adds up over time . When you consider the amount of volume that is transacted in the market every day , you begin to realise that basis points really matter .
A second benefit is a reduction in explicit costs . Venues , including exchanges , provide a valuable service , but that service should not come with an entitlement . Fair and open competition should be the driver for market share because that is what will drive innovation .
Europe seems to be trying to discourage systematic internalisers as they did dark pools , and make sure trading volumes go through a lit exchange . However , an exchange is just another venue . Price discovery and transparency are important to our market , but forcing volume to lit exchanges is not the only answer . There are other ways to achieve the same goal , for example
14 // TheTRADE // Summer 2021