Following recent trips to Hong Kong and Singapore, and the east and west coasts of the US, Liquidnet’s Head of Market Structure & Strategy in EMEA, Rebecca Healey, shares her insight about what she heard from asset managers across the globe and how MiFiD II impacts them.
The impact on liquidity
Firms worldwide are keen to understand how the new European MiFID II regulation will affect liquidity on markets. Will bulge brackets be able to maintain their pre-eminent position? Will block trading continue to rise in popularity?
From January 3, 2018, MiFID II investment firms will be required to trade instruments only on a regulated market (RM), a multi-lateral trading facility (MTF, which is similar to an ATS), or with a Systematic Internaliser (SI). Broker dark pools will no longer be allowed to operate. Firms can continue to trade OTC, but only on an occasional and ad-hoc basis — once they trade over a certain threshold, the firm has to become a Systematic Internaliser (SI) in the instrument.
Future of the sell side?
It is here where we still have the greatest debate. The challenge for the industry comes from a strict interpretation of new guidance around the SI regime. The most recent clarifications from the EU Commission state that an SI is not allowed to engage, on a regular basis, in the internal or external matching of trades via matched principal trading, or other types of de facto riskless back-to-back transactions, in a given financial instrument outside a trading venue. A strict interpretation of this ruling would prohibit much of the way the sell side works today. This is causing concern that certain brokers, whose equity businesses are already struggling as a result of unbundling, will decide to pull out of Europe entirely. It seems that the winners out of all this change may be new electronic liquidity providers (ELPs) over the traditional brokerage houses. Recent research conducted by Liquidnet showed that three-quarters of firms are currently reviewing their broker lists and a third plan to make a wholesale change ahead of January 2018. Once seismic change such as replacing bulge brackets with electronic liquidity providers occurs in one regulatory jurisdiction, it is difficult to see how this change will remain within Europe’s borders.
The rise of block trading
The future formation of liquidity will not just depend on the way that brokers will operate. Due to the incoming European Double Volume Caps (DVCs), block trading is on the rise with a shift towards large-in-scale trading (as described in Liquidnet research report 'The New Dark Age, Aug 2016'). This coincides with the rise of block trading also taking place in APAC and other regions.
Trade close to home
Another ongoing debate is the potential requirement to trade all instruments on the European venue where the instrument is listed, which would translate into European firms being forced to trade Samsung or Apple in Frankfurt, rather than in Asia or the US, creating a potential liquidity drain on the local markets.
With less than 155 days now to go, it is clear that there are a number of issues still to be addressed. We will be sure to keep you up to date as the regulatory discussions progress!