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information out to the market , then traders will naturally find the next best thing , which is the systematic internaliser .
If you give the buy-side numerous options on how to execute orders , whether using a dark pool , large-in-scale dark pool , systematic internaliser , a lit exchange , periodic auctions and so on , then they can optimise how and where they are going to trade . If a buy-side trader can execute at a better price for a lower explicit cost , then clients benefit . Therefore , if the performance and liquidity of systematic internalisers continues to improve , buy-side traders will naturally continue to favour these venues .
I think the desire to use systematic internalisers will continue to grow in Europe because of restrictions on dark pools , as opposed to in the UK which seems to be opening
LC : There actually have not been a tremendous amount of challenges for the buy-side trading desks coming out of Brexit . Like I said , a lot of time and money was spent having to prepare for the unknown , but in the end , a lot more of the costs have been absorbed by the broker-dealers and venues . They have had to split operations , realign their legal structures , launch duplicative products and move people to different countries . I am sure this is going to have a knock-on effect of consolidation and margin pressures , which eventually will make it back to the buy-side through higher commissions or reduced coverage .
Regulatory change is driving costs higher regardless if that is in the form of Brexit or MiFID III and these costs have a permanence which put pressure on margins and encourages consolidation . a centralised consolidated tape .
AS : Do you expect trading volumes taking place on systematic internalisers to continue to increase ? LC : If you keep raising costs and leaking information out to the market by making it difficult to trade on dark pools then using an internaliser is a natural consequence . The market is going to want to find a solution and if this is the only allowed solution then that is what traders will use . Water flowing down a mountain naturally over time will find the most efficient way down that mountain . If regulators keep putting up these blocks that limit the use of dark pools that in turn means orders cannot be executed efficiently without leaking
“ Regulatory change is driving costs higher … these costs have a permanence which puts pressure on margins and encourages consolidation .”
up more options for traders to optimise their trading strategies . This is not necessarily a bad or a good thing , but we could end up with a similar situation to the FX market where certain banks are able to internalise a decent percentage of the volume and the buy-side will then be able to figure out which one of those brokers is going to have the biggest liquidity pool and then route accordingly .
AS : What has been the greatest challenge the buy-side has faced post-Brexit ?
Efficiency is a key factor driving our industry and with more resources going into legal and compliance , the more pressure we have to find ways to reduce costs . So , even though our traders are still in the UK and Switzerland following Brexit and we are still trading the same way using the same technology systems , we still feel the cost pressures and will continue to look for ways to improve efficiency , be it through consolidation , automation or outsourcing .
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