Analysis of AMF data reveals largest ELP SI market shares in France

By cross referencing other market share data in Europe The TRADE reveals which ELP SIs were analysed by the AMF in the first quarter, and how they ranked in terms of market share.

XTX Markets grew its market share as an electronic liquidity provider systematic internaliser (ELP SI) in French equities from around 8% to a market-leading 13% during the first quarter, according to a recent analysis on stats from France’s regulatory watchdog.

While the Autorité des Marchés Financiers (AMF) did not explicitly name the ELP SIs in its research and the analysis is based on activity in French stocks, by cross-referencing the analysis with other European market share data, such as TABB Group’s research earlier this year, The TRADE has uncovered which ELP SIs were analysed, and where they stand in terms of market share in French equities. 

The findings reveal that XTX Markets was recognised as the largest ELP SI in French equities, with a market share of 13% by the end of the first quarter. XTX Markets confirmed The TRADE’s findings on the AMF SI report, which also showed that the market maker provided the lowest market impact and highest price improvement during the period.

The method shows that Citadel Securities held the second largest ELP SI market share in French equities at roughly 9% during the period, followed by Tower Research Capital Europe at just over 8%. Elsewhere, Hudson River Trading held just over 4% of the market share, while Jane Street and Virtu Financial held roughly 1% each.

First introduced under MiFID, the number of SIs operated by banks surged under MiFID II when it was introduced in January 2018. SIs replaced broker crossing networks, which were banned, and the landscape saw the emergence of SIs operated by liquidity providers, known as ELP SIs.

As the number of SIs in operation grew, the buy-side raised concerns about a lack of transparency and understanding as to how the venues function. A poll from the TradeTech Europe conference in April last year found that 56% of delegates were unsure about how ELP SIs differ from each other.

The AMF’s research shines a light on some of these issues, providing in-depth statistics on each venue’s metrics such as market impact and price improvement. The analysis is more detailed than other studies into the SI trading landscape, likely because it encompasses data that only the regulator has access to.

In the first quarter this year, the study found that SIs operated by banks accounted for 76% of the French SI market, while ELP SIs accounted for 24%. Each ELP SI was numbered in the report from one to six according to their ranking in market share.

The AMF noted that the study revealed a wide variety of profiles for the venues, depending on the participants. For example, ELP SIs differ greatly from bank SIs in terms of market impact and price reversion. As ELP SIs primarily execute small transactions, price reversion can usually be seen in the few minutes after a transaction, while bank SIs typically execute larger sized orders over €200,000, so price reversion is usually seen up to 30 minutes after a trade. The analysis by the AMF revealed how each ELP SI performed in terms of market impact. 

ELP_1 and ELP_4, now identified by The TRADE as XTX Markets and Hudson River Trading respectively, had practically no market impact as no movement in Euronext prices was observed once a transaction is completed. This was particularly noticeable when trading with XTX Markets, according to the AMF.

“This price trend is particularly favourable after the transactions made on ELP_1 and seems to show the ability of some SIs to hold the positions originating from their client, or at least to manage and possibly hedge them without causing a price impact that could jeopardise the continuation of their client’s executions,” the AMF said. “Under these conditions, these execution venues prove to be attractive sources of liquidity for their clients.”

Hudson River Trading did not respond to requests for comment from The TRADE.

ELP_2, identified by The TRADE as Citadel Securities, was also recognised as being especially strong on market impact and “particularly competitive” when prices are moving. The AMF noted that a “slight impact is observed, which starts to diminish two minutes after the initial transaction”.

“We appreciate AMF’s observations around the value that ELP SIs contribute to the market and would welcome further analysis that highlights how investors directly benefit from the quality of liquidity and price improvement that they provide,” Jonathan Finney, global head of equity development at Citadel Securities, told The TRADE about the findings.

ELP_3, ELP_5, and ELP_6, identified by The TRADE as Tower Research, Jane Street and Virtu Financial respectively, were not highlighted as being strong on market impact according to the research, which the AMF indicated could mean that they do not hold their positions for very long and offset quickly on other venues.

Jane Street and Virtu Financial declined to comment on the findings.

“ELP_3, ELP_5 and ELP_6 seem to be the participants (among the SIs represented here) that are associated with the sharpest drop in prices following the sale of clients via an SI,” the research stated. “This decline could be caused by these SIs, suggesting that these participants do not keep the position they have acquired vis-à-vis the client for long and quickly unwind it in the market, passing the impact on to the market that the client might have had if it had dealt directly with it.”

The AMF added it cannot rule out that the market impact and price trend could be related to clients and market participants rather than the ELP SI. However, the regulator warned that if the trend continues over time, some ELP SIs may have to “revise its strategy (in particular vis-à-vis its most unprofitable clients), or risk jeopardising the profitability and sustainability of its business”.

On price improvement, the AMF found that SIs generally perform well against other venues and of the amounts executed on SIs during the first quarter, 54% is executed at the same price as on the Euronext French order book, while the remaining 46% is executed at an improved price.

ELP SIs offer more price improvement than bank SIs, the regulator noted, although price-improving flow generally represents 50% of volumes processed at bank SIs, compared to between 17% and 60% of volumes processed at ELP SIs. However, bank SIs execute their remaining volume outside of the market spread, while ELP SIs execute the rest at the same prices as those displayed on Euronext.

The data from the AMF showed that ELP_1, identified as XTX Markets, had the largest proportion of price improvement flow during the first quarter at more than 60%, followed by ELP_5, identified as Jane Street, with almost 40% of flow executed at an improved price over the period. Citadel Securities’ price improvement flow stood at around 32%, while Tower Research had just over 20%.

“This is the first independent, authoritative analysis into SI liquidity providers based on actual data,” Jigar Patel, global head of business development at XTX Markets, told The TRADE regarding the AMF’s research. “As a regulator, the AMF has unique access to non-anonymised SI data and exchange market data, which demonstrates the key differences between SIs. As ELP_1, XTX Markets is pleased to have been shown to have the lowest market impact and best price improvement within the report, demonstrating the quality of our liquidity provisioning.”

While this analysis serves to place ELP SIs ahead of the pack in terms of price improvement, incoming rules under MiFID II on tick sizes could have a far-reaching impact on SIs and their ability to improve prices for clients.

SIs will be subject to the tick size regime in June following a delay to enforcement due to disruption caused by the coronavirus pandemic. Exchange operators and other venues have long-argued that SIs have an unfair advantage over lit venues not being subject to the tick size regime, because they have greater capacity for price improvement. They argued that this could divert routing of client orders towards SIs rather than on-exchange venues, a principal aim of Europe’s MiFID II.

Once SIs fall under the tick size regime on 26 June, the AMF warned price improvement on SIs could dampen. It calculated that nearly 40% of total volumes currently traded on SIs are at a price that will not be allowed under the rules. During the first quarter, the AMF found that 43% of improved prices were lower than a tick and in breach of the upcoming requirements. The regulator warned that some ELP SIs may have to rethink their business as a result, including ELP_3, identified by The TRADE as Tower Research.

“For Q1 2020, 57% of ‘improved prices’ were not compliant with the tick size regime (and more generally, 36% of volumes traded in the continuous trading phase). In particular, the third largest ELP SI (in terms of market share), whose price improvement is mostly concentrated around one tenth of a tick should revise its client offering,” the study stated.

Simon Dove, liquidity management and managing director at Tower Research Capital Europe, told The TRADE: “We welcome the AMF’s in-depth analysis and in particular their efforts to identify SI volumes that represent genuine accessible liquidity rather than technical trades. We believe this report supports our view that SIs compliment other execution venues and provides end investors with a choice to meet their particular liquidity needs.”

Almost one year after ELP SIs were introduced under MiFID II, Matt McLoughlin, head of trading at Liontrust Asset Management, told The TRADE as part of a debate on ELP SIs with Citadel Securities and investment bank Jefferies, that price has become less important for the buy-side compared to other metrics, such as market impact and size.

“For the buy-side, I think market impact and size has become a lot more important,” he said. “I’m not looking for a twentieth of a tick price improvement, I’d rather have larger size and lower market impact. It’s strange to say it as a trader who is addicted to getting the best price – but the best price is not always best execution for me.”

Senior buy-side traders recently backed SIs in an ongoing review of MiFID II, which suggested the removal of SIs as an execution venue under the share trading obligation. BlackRock said in its response to the proposal that it is essential to safeguard SIs as they play a crucial role of providing principal liquidity for large trade sizes.

ELP SI operators have looked to educate the industry on the differences and nuances between each of the venues, as some focus on market impact or size, while others focus on providing unique pools of liquidity. Some market participants have argued that scrutiny and criticism of the SI regime has allowed market makers to provide more transparency around how the mechanisms operate.