The trading industry is on the edge of its seat. MiFID II may be better known for
conjuring up feelings of frustration
and confusion, but when it comes
to order flow there is a sense of
anticipation as participants wait to
see where it will land.
The rules will see the closure of
broker crossing networks (BCNs)
in 2018, causing a seismic shift in
order flow and behaviour within
the trading landscape.
This activity will not disappear
into thin air though and order flow
will have to go somewhere. Where
that will be has been a topic of
intense debate but as we move into
2018 we now have a clearer picture.
Despite the backlash and
rumours of firms attempting to
circumnavigate rules, it appears
as though the European Securities
and Markets Authority (ESMA) will get what it want-
ed from MiFID II in terms of transparency and activity
on trading venues.
The question was once again thrown up in the air
after ESMA proposed last minute changes to the systematic internaliser (SI) tick size regime in November.
It said shares traded privately inside banks should be
in the same price increments as on public exchanges.
In other words, ESMA has levelled the playing field
between SIs and exchanges and there is now all to play
for in terms of which venues will sweep up the order
flow and activity from BCNs in 2018.
“BCN activity is around 30% of total daily volume
and market participants don’t realise how significant
that is,” says Michael Horan, head of trading at Persh-
ing. “That activity needs to find an immediate home
and those who run the BCNs will suffer from losing
that liquidity. The only way to keep it is to rehouse it
as a multilateral trading facility (MTF), but that’s very
unlikely to happen. The activity will end up with SIs
or with the exchanges and that’s how it will stay for
the first few months.”
The liquidity will not just disappear. People will still
buy equities and markets will continue to function.
Certainly ESMA has clipped the wings of SIs and
reduced the head start the venues once had, so it
makes sense to foresee more activity on lit trading ven-
ues, but the activity is yet to shift. Some experts have
predicted a drop in volumes and order flow during the
first few months of 2018 as market participants wait
and see what others will do or where they will send
Reversion and impact costs will
be a massive factor as to where
the order flow will migrate to in a
post-MiFID II world.
- MAT THE W MCLOUGHLIN, HEAD OF TRADING, LIONTRUST