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MiFID II’s Trading Hereafter: Systematic Internalizers & Block Venues

Traders Magazine Online News, April 3, 2018

Ivy Schmerken

MiFID II went live on Jan. 3 without much fanfare, but the EU regulation is already shifting trading behavior toward Large-in-scale block trading venues and new venues called systematic internalizers run by banks and high frequency trading firms.

In a post-mortem webinar, MiFID II Trading Technology Requirements:  What Worked and What Hasn’t?, hosted by UK-based A-Team Group, market participants cited the rise of systematic internalizers or SIs as one of the main consequences of MIFID II.

Systematic Internalizers

Buy-and sell-side firms have spent the last two months getting familiar with the SI regime and adapting to pre- and post-trade transparency obligations. But firms are sometimes not sure if the counterparty is an SI, and in a few cases, have reported the same trade twice.

Because MiFID II prohibits trading on broker crossing networks, panelists said they expect volume to move to exchanges and SIs run by banks as well as HFTs or electronic liquidity providers (ELPs).

“The shift was well telegraphed by the equity markets, as the market saw most of the broker crossing networks (BCNs) shut down throughout December. Then there was a move instantaneously over to systematic internalizers, said Ben Stephens, managing director, head of business development at Instinet Europe.

However, Stephens raised concerns about the growth of bilateral trading through SIs and via banks when the main point of MiFID II was to increase trading on lit exchanges.   The ability of SIs to offer bilateral trading is a function of the increasing processing power of computers. “It’s entirely up to a firm if they want to register as a systematic internalizer and offer their software to trade as a principal on a bilateral basis,” said Stephens.

Block Trading

Another major trend has been the surge in block trading. “The net result is that a lot of trading volume has moved to venues that offer Large in Scale trading,” said Instinet’s Stephens on the webinar.  This trend started in the middle of last year and has accelerated, he observed.  “And that coincides with a real desire by the buy side to get larger blocks done,” said Stephens.

Platforms like Turquoise Plato Discovery, CBOE LIS (formerly BATS LIS) and Liquidnet, have seen their volumes rise as the buy side seeks to trade over the LIS size.

Dark pools that don’t trade above Large in Scale trading have seen their volumes decline by a third, according to Instinet’s Stephens.

Dark Pools & Double Volume Caps

MiFID was off to a “soft start” because ESMA temporarily delayed the curbs on dark pool trading. But with the launch of double volume caps, MiFID II “has a harder edge to it,” said Mark Pumfrey, Liquidnet’s head of EMEA in an interview with TRADE TV.

Under the “double volume caps” or DVC rules, stocks can trade up to 8% of their overall volume in the dark, and up to 4% on each dark pool.

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