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“ It is abundantly clear that ESMA ’ s proposals to introduce additional pretrade transparency will in fact entirely destroy the usefulness to investors of EU-based FBAs .”
on SIs and dark venues . If the proposals were to go forward in their current form , some of that flow could be encouraged onto lit markets . Large orders , they [ Europe ] can clearly see a rationale for dark trading ,” adds Wicks .
Regulators are seemingly aware that historically when they have squeezed dark trading , alternative venues such as systematic internalisers ( SIs ) and frequent batch auctions ( FBAs ) have seen an increase in volumes and it is these quasi-dark corners of the market that they are subsequently shining a light into , both through their recent update to MiFID II and their potential future regulatory updates that could follow the RTS 1 and 2 consultations .
“ Europe is trying to carry on that transparency process in more areas where they didn ' t go as far as they needed to ,” said Gareth Exton , head of execution and quantitative services for EMEA at Liquidnet . “ It ’ s now
NICK DUTTON , CHIEF REGULATORY OFFICER , CBOE EUROPE these other things that have come up because of MiFID II , which is the FBAs and the SIs , which they now want to have a have a go at . It ’ s trying to now shine a bit more of a light onto what ’ s happening pre-trade .”
Systematic internalisers Systematic internaliser volumes have on occasion been inflated in Europe by regulators . In June 2021 , ESMA published a set of data claiming that on-venue equities trading was in steady decline with SIs labelled one of the main culprits . The report followed data in November 2019 , that had found that the Goldman Sachs SI had dominated European equity trading that year , however , this conclusion was later deemed to have been generated with an incorrect data set . The number was inflated by clearing trades , due to the size of the investment bank ’ s prime brokerage business . The regulator was consequently called out by various industry associations , including Oxera and AFME , for its inaccurate perception of the marketplace . According to Liquidnet , systematic internalisers in the third quarter of this year made up 13 % of the overall trading volume in Europe .
In its recent changes to MiFID II , several changes were recommended by the Commission to curb SIs , including upping the minimum quote size to two times standard market size ( SMS ) and limiting their ability to match at mid-point to when they are trading above twice the standard market size , but below the LiS threshold , while complying with the tick size as well as above LIS . It should be noted , the two times SMS is just a quote size and SIs can trade below that . Regulators have also suggested prohibiting payment for order flow for SIs , instead requiring them to earn retail flow by publishing competitive pre-trade quotes in another move to force smaller trades back into the regulated markets . The Street is mixed in its approach to the changes to the SI regime , with many buy-side firms seeing the benefit of liquidity provided by the mechanisms , particularly when it comes to small orders .
“ If you think about in order that you may be trading on a scheduled basis over a period of time ,
28 // TheTRADE // Winter 2021