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MiFID II seen as improving market access to liquidity

The period since the introduction of the revised Market in Financial Instruments Directive (MiFID II) at the start of 2018 has been marked by the emergence of electronic liquidity provider (ELP) systematic internalisers (SIs) and a major improvement in market structure in terms of access to liquidity, say panellists at this year’s TradeTech Europe conference.

At the two-day event at the Palais des Congrès de Paris, panellists agreed that while concerns persist the transparency of how SIs operate and how these mechanisms differ from each other, progress has been made in addressing the issues.

“All of the ELP SIs are genuinely different; some focus on market impact or size, some focus on specific parts of the stock universe,” said Jigar Patel, global head of business development at currency trader and market maker XTX Markets. “It’s really down to the broker to understand each SI’s characteristics and use the right liquidity provider and match them with the right end user, to really curate that liquidity pool,”

He added that some brokers have made greater progress than others, while Citadel Securities’ Director of European Business Development, Jonathan Finney, said that brokers had become a key part of this infrastructure.

New options for liquidity

From the buy-side perspective, Liontrust Asset Management’s head of trading, Matt McLoughlin, said that although they are not the answer for every type of order, ELP SIs are providing new options for liquidity and that most firms are now interacting with these entities, even if they have not connected bilaterally.

“If you connect bilaterally, as we do at Liontrust, you can benefit from larger size, better price while price improvement is still available before the regulators make their change, and also lower market impact, which is something that we value quite a lot,” he said.

According to Simon Dove, head of liquidity management at Tower Research Capital Europe, criticism of the SI regime had allowed market makers to provide a greater level of transparency around how the mechanisms operated, the liquidity and technology involved.

Not all conference attendees were convinced. In an audience poll, 56% of respondents said they are unsure of how ELP SIs differ from each other, 51% said the biggest challenge they faced was understanding who they were interacting with, while 82% said they did not receive sufficient information on the mechanics of how SIs work.

Despite this ELP SIs seem to be winning over market participants as they reached record market share earlier this year, according to an analysis by TABB Group. Total daily notional among the six electronic ELP)SIs that regularly report volumes to TABB Group reached €1.45 billion in February, the highest level to date, and up from €1.12 billion in January.

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