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With MIFID II implementation now six months behind us and its impact on European equity market structure eagerly awaited, TABB Group says new execution forms are already gaining a foothold, including ELP SIs. Currently ELP SIs account for a small but growing proportion of equity trading, as much as 2% of order book trading and €1billion on a daily basis as of end of June.
“With MiFID II six months in force,” says TABB Group research analyst Tim Cave, who wrote “MiFID II’s SI Regime: Analyzing Non-Bank Liquidity in EU’s Equities Markets,” “now is a good time to examine one of the most closely-watched areas of the rulebook: the systematic internalisers’ (SIs) impact in executing share transactions and, in particular, SIs run by several of the world’s largest electronic liquidity providers (ELPs). This represents a significant shift for European market structure.”
The recent publication of MiFID II’s first RTS 27 execution quality report, covering the first quarter of 2018, sheds light on volume and nature of ELP SI liquidity. Analysis of reports by Cave found that €27.9 billion was traded via ELP SIs during Q1 2018, with average daily notional of €309 million, €481 million and €563 million in January, February and March, respectively. According to Cave, firms that have opted-in have experienced limited market impact with some larger-than-anticipated fills. The buy side, however, continue taking a cautious view until more data is available.
To date, eight ELPs registered SIs: Citadel Securities, Jane Street, Jump Trading, Sun Trading (now part of Hudson River Trading), SSW Market Making, Tower Research Capital, Virtu Financial and XTX Markets. Jump, SSW and XTX are just starting their SI, while the others have been live since the MIFIDII start. Cave says more could follow, including IMC and Susquehanna.
Numerous challenges lie ahead for ELP SIs, not least of which is winning over the buy side and improving connections with brokers. Then there’s Brexit, which might require SIs to potentially run two operations. “Time will tell how big these SIs become,” says Cave, “but they’re likely to be one of many execution channels available for buy-side investors to opt into in the years ahead."
Available now for download by TABB equities clients and pre-qualified media at https://research.tabbgroup.com/search/grid, the 15-page, 9-exhibit report examines adoption and activity of registered ELPs SIs, execution quality measures, volumes and order sizes. To buy the report, go to the Executive Summary at tabbgroup.com or write to info@tabbgroup.com.
