3rd CEPR-Imperial-Plato Market Innovator (MI3) Conference 2019
Keynote: A Year since MiFID II
Dr Andrei Kirilenko
Andrei Kirilenko is the Director of the Centre for Global Finance and Technology at the Imperial College Business School. Prior to joining Imperial in August 2015, he was Professor of the Practice of Finance at the MIT Sloan School of Management and Co-Director of the MIT Center for Finance and Policy. Professor Kirilenko’s work focuses on the intersection of finance, technology and regulation.
Main Takeaways and Quotes
Since the 2018 MI3 Conference, a number of significant shifts in the European equities landscape have taken place, not least of which the implementation of MiFID II. The objective of the MI3 conference is primarily to bring together market participants, regulators and academics to find solutions to the problems and means to harness the opportunities that changes in the landscape may offer. This message was at the core of Dr Kirilenko’s Keynote.
He opened by raising the issues surround research data faced by researchers in the UK:
“It’s very difficult to publish research that is not US-centric; It is very difficult to work on things, especially if you don’t have the data [… which is] somewhat more plentiful on US related things. So what we wanted to do was to make sure that we start over time solving [this issue]”
The backbone of the keynote focused on a paper produced in collaboration with Kumushoy Abduraimova, a PhD student at the Centre for Global Finance and Technology. The research looked at data from BMLL from pre and post-MiFID II implementation looking at turnover, volume and number of trades at a number of European trading venues.
The trend noticed was that the quantity traded off exchange markedly increased between January 2017 and 2018, with a particular spike in Systematic Internalisers (SIs). This continued to become more pronounced over the course of 2018, reducing slightly and resettling between September 2018 and January 2019.
“[Systematic Internalisers] existed under MiFID I, but they have been expanded under MiFID II. Here’s the definition under MiFID II: are ‘investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account by executing client orders outside a regulated market, MTF or OTF without operating a multilateral system’ … What that means, at least to me, is that these are not exchanges and they execute under own account which means they have tablot requirements underneath it […] It’s a risky activity that has to be compensated in some way by providing a service, and it is supposed to be an alternative to market participants by providing a valuable source of liquidity”
Dr Kirilenko talks about how SIs have the opportunity to distinguish between categories of clients in a way that exchanges are unable to. They are able, therefore, to charge clients different amounts, and are subject to different transparency requirements, particularly post-trade, and they are also exempt from the tick-size regime, and so can also post inside the tick.
“If you’re expanding the scope or creating a new regulated entity you need to give them something to get their business model off the ground or they would be like ‘what’s in it for us? OK you want to regulate us; what are you giving us to get us off the ground?’ … These seem to be the economic driving forces behind this regime.”
The talk goes on to ask questions around whether SI has grown proportionally across all STOXX600? His first hypothesis is that MiFID II affects all STOXX 600 structurally similarly. At first glance, yes it does, and there are no clear distinguishing patterns or activity. However there is another side to this question:
“One thing that’s happening while MiFID II is playing out is Brexit is playing out – is there anything we can see in this activity that is potentially affected by that [Brexit uncertainty]?”
To analyse this question, Dr Kirilenko breaks down 50/50 split stocks between EU27 / non-EU27. The theory is that there is where the uncertainty hits hardest. One specific example is a French bank with half its activity in the UK and half not: “There we do see quite a bit of a change … It [the existence of SIs] acts as cushion in terms of liquidity to partly compensate the uncertainty related to Brexit: It’s a good thing. It means that this liquidity is going to change the way it’s matched but it’s going to be less dramatic.”
The same isn’t the same for all stocks. “There is quite a bit of work to do”; the data is not as granular as it should be, and the data isn’t in a position where it can be easily deployed to answer questions around the effect of SIs and MiFID II, however the research is moving towards that point.
Dr Kirilenko closed with broader comments around research into market data and the point of MI3 more generally:
“Our vision is making this an informed debate: a debate based on data; debate based on models; debate based on analysis. We understand that it’s politically charged [… and that] this could have unintended consequences, but we are moving in this direction; were very happy to see more work in this regard.”
Images: Muhammad Ashraf ©2019