While the majority of respondents to the latest poll on theTRADEnews.com thought the primary impact of a ban on broker crossing networks would be poorer execution performance, many admitted market transparency could improve.
Almost 35% of respondents said a prohibition of BCNs would negatively impact execution performance for the buy-side, just ahead of the 30% who thought better market transparency would be the primary outcome. Increased trading on dark multilateral trading facilities was voted for by 19%, while the remaining 16% said the main outcome would be greater on-exchange liquidity.
“I agree with those that voted for poorer execution performance as the main impact of a ban on BCNs,” said Mark Goodman, head of quantitative electronic services at Société Générale Corporate and Investment Banking, which launched its second BCN earlier this month. “Brokers have the control and discretion to ensure that execution performance is good not just for the individual order concerned, but for the client’s parent order.”
He explained that while a buy-side trader may receive a good fill in a dark MTF, the price for the security may move against them in the moments following the trade because of the presence of high-frequency trading strategies. By using a BCN, the buy-side client can tell their broker not to cross against certain types of flow or impose a minimum execution size to prevent pinging.
There is also still too much opacity on the exact contents of different BCNs, said Steve Grob, director of group strategy at software vendor Fidessa, which may explain the 31% who foresaw greater transparency.
“One of the biggest criticisms leveled against BCNs is that you may not who you are trading against,” said Grob. “It could be the prop desk, another counterparty, or your broker could even be using its own algo to shop your order around to different dark pools.”
Grob thought there was room for a range of different matching services, but said “it’s important each one has a clear description about the type if liquidity they interact with”.
But rather than banning BCNs, Goodman believed a cleanup of post-trade data was much more important from a transparency perspective.
“If policy makers want more trading to be transparent, they should focus on developing a consolidated tape,” he said.
Goodman was also unsurprised just 16% of people believed a BCN ban would result in more liquidity moving on-exchange – which would appear to be the main goal of the European Parliament.
“People use the dark precisely because they don’t want to trade in a displayed environment,” said Goodman. “If the ability to trade in the dark is limited, orders are likely to stay on buy-side traders’ blotters, rather than be routed elsewhere.
In its amendments to MiFID II, the European Parliament has suggested that as much off-exchange trading as possible be conducted through systematic internalisers. BCNs would be captured by this proposal because they are a subset of OTC trading under MiFID I.
But in a meeting among MEPs to discuss the amendments last Wednesday, some MEPs thought an alternative structure for BCNs would be appropriate.
It is clear the buy-side want choice, with Tony Whalley, head of derivatives and dealing at Scottish Widows Investment Partnership, saying at last week’s TradeTech Europe conference that he feared that regulators would tie down dark pools so they all become the same.
“That would not achieve anything – we need the choice of where and how to trade,” he said.