[ I N D E P T H | R E G U L A T I O N ]
strategies , which tend to trade in smaller sizes - a pattern we ’ ve seen in other competing markets ,” Baugh adds .
to offering different services for different securities in different jurisdictions .
“ When you think about trading larger size block business clearly the reason why the market has alternatives is to facilitate that type of workflow so as not to negatively impact the underlying price of a given stock ,” says Baugh . “ It could become more expensive to trade in Europe because the implicit costs of trading go up on the basis that there are less choices available , particularly to institutional investors . Too much fragmentation will also certainly lead to an increase in direct costs from stitching these different liquidity pools back together , but also just in terms of the implicit costs of trading for the end investor themselves .”
With the re-introduction of certain EU securities expected to follow regulatory divergence , the cost of trading in London is also expected to go up . According to statistics from Cowen , for the first six months following the re-introduction of Swiss securities into London in February , the implicit cost of trading rose by around half a basis point , and this number was increased further for smaller trades . “ One might say this is the cost of competition – facilitating certain time sensitive arbitrage
The future As it stands the ball is now in the UK ’ s court . With the results of its Wholesale Markets Review due to come into play early next year it must decide how extensive its liberalisation will be following the recent MiFID II changes proposed by Europe . If too liberal , it could spark a shift in liquidity that fragments the markets once again , just a year after the dust has settled post-Brexit . Regulators on either side of the channel are pulling in opposing directions and this brings with it the likelihood that participants in the not too distant future will be executing in a divergent and fragmented world . Hold on to your hats .
“ You ' ve now got two almost diametrically opposed views of liberalisation on one side of the channel and trying to create a more effective price discovery mechanism on the other . The irony of it is that we probably should aim for something in between , but because of the various politics that ’ s going on we ' re seeing this massive divergence taking place ,” concludes Haynes .
“ Unfortunately , the structure of the market is such that there is no such thing as a lit market that is perfect today and as a result we brought in dark trading to find other mechanisms to be able to allow people to trade in size without moving price . You need to change the lit books to make them more effective , make them more liquid and get more people to trade in the lit environment so that you get the right prices .”
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