One Year into MiFID II
One of the key objectives of MiFID II was to restore investor confidence in European capital markets through improved transparency. One year down the road, while MiFID II is still a work in progress, it seems the industry has adjusted to the new liquidity landscape. The introduction of the Double Volume Caps aiming to limit trading under the reference price and negotiated transaction waivers to enhance pre-trade price transparency has had limited impact in moving trading back to lit markets as initially anticipated. Instead, liquidity has fragmented over a wider range of execution options as the sell side adapts its offering to the new market realities. As a result, 2018 saw the growth of new types of trading venues:
Periodic auctions, often seen as an alternative to sub-LIS dark trading post the implementation of the DVC, represented circa 2% of the market in Q4 2018. *1
Systematic internalisers (“SIs”) also grew substantially in the first half of 2018 and stabilized at approximatively 15% of the market. *1
However, the amount executed on these venues has decreased since August 2018. With the European Commission’s recent adoption of an amendment *2 subjecting SIs to the tick size regime for standard trade sizes, therefore restricting their ability to price improve, it is very likely this will lead to further change in liquidity formation within SIs.
The buy side acknowledges the greater freedom it now has in selecting execution counterparties as unbundling has changed the traditional buy/sell-side relationship. The responsibility to source liquidity sits increasingly with the buy-side trader along with the obligation to evidence best execution altering trading behaviours. Greater emphasis from the dealing desk on execution quality has led to a greater reliance on Large-in-Scale trades as the proportion of dark trading that is large in scale stands at 36%1 compared to ~10% in 2016*3.
While MiFID II has led to an adjustment in trading patterns, it has also changed how asset managers approach and consume research. Although 2018 has been a transition year for buy-side firms to collect sufficient data, and assess and evaluate their consumption of research, unbundling is now a global commercial requirement that goes well beyond the scope of MiFID II *4. As firms now have 12 months’ worth of data regarding those from whom they have taken research and the quality of that research, it is safe to say they will become more judicious in their selection of research providers in 2019. Bulge bracket banks continued to dominate the top 10 research broker lists; however, increased scrutiny over research quality along with greater transparency in research pricing may well change this situation in 2019.
Charlotte Decuyper, EMEA Market Structure Analyst, Liquidnet
1 MiFID II Liquidity Landscape, Liquidnet, Q4 2018
2 http://ec.europa.eu/finance/docs/level-2-measures/mifir-delegated-act-2018-8390_en.pdf
3 Shape Shifting: Accessing the Dark Post MiFID II. Liquidnet, December 2017
4 Unbundling Research: Canary in the Coalmine