Wednesday, 25th April 2018. 1105 – 1145.
A keynote discussion panel at TradeTech 2018 saw leading European Systematic Internaliser (SI) operators – including representatives from Goldman Sachs, HSBC and Credit Suisse – outline their optimism for the future of SIs after an initially cautious approach.
The experts also assessed trends in the space from the effects of SIs on liquidity to market fragmentation and from true SI volume to conflicts when interacting with others.
The buy-side are becoming increasingly comfortable interacting with external SIs due to the transparency they offer.
There will likely be more SIs coming to market which could see further fragmentation. Brokers must be able to deal with this moving forward in terms of routing client orders.
MiFID II has not helped to clean data for SI volumes. It’s difficult to judge what SI volume reported is truly at risk or how much double counting there really is.
There is a lot of numbers flying around about SI volumes – do we have any idea about specifics?
“This is a massive bug-bear for me. We do our external and internal data sources, but the spread of SI volumes is incredibly wide. It’s a good thing that the industry isn’t taking a standardising approach – but it’s taking a lot longer to get to the bottom of things than we would have liked.”
“The data is noisy. MiFID II hasn’t cleared up the data as much as we would have hoped, especially by double-counting standards. But it’s a nascent market and we’re still in the early stages.”
How are SIs impacting liquidity?
“It’s far better than we would have expected. Our contacts are showing similar trends.”
“It’s very much a moving target; data we have today may not be applicable in the next month. More firms are attaching SIs over time, and more clients are engaging with them. This is not a stable market structure – when it does become one, then we’ll know where we stand.”
Is there a conflict when you’re running your own SI and interacting with others?
“Everything that we do is in pursuit of best execution – this is very robust. Our own SI is built around the provision of block liquidity and the vast majority of interactions are catered for this process.”
“We connect to five Electronic Liquidity Providers (ELPs) including our own SI – so there are a broad set of liquidity decisions to make. The way we evaluate this is to look at how the mid-price evolves after execution.”
There’s been a lot of talk about opting in and opting out of SIs – what have been your experiences?
“I feel clients are becoming more comfortable with the new regime and, anecdotally, conversations with the buy-side suggest they are more comfortable interacting with external SIs. That is part of the conversation moving forward, profiling the right kind of risk for the right client and ensuring they are finding the liquidity they are looking for.”
“We’re connected to five ELPs and two other parties – seven in total. When we talk to the client, we now have the range of data to give them an overview of what is working.
“We provide full transparency and flexibility and we ask our clients to embrace the change. Given the fragmentation going on in Europe, etc, we advise our clients that these are great places to trade. We tend to see 50-60% are satisfied, where we usually see 10-20% spread capture.”
Q: is there anything you’d like to see tweaked around the regulation?
“It’s early days, though we have good experiences so far. There are unfair advantages for exchange, but it’s something that isn’t part of our core strategy as an SI. Overall, we’re pretty happy with it.
Is there a limit to the number of SIs that we’re going to see?
“Currently, there are 130+ venues that we could move our orders onto. Lots of firms are launching SIs, so there’s definitely the opportunity for more to come to market, and we are set for further market fragmentation.”