The world’s largest asset manager has spoken out about the potential threat to midpoint trading in the wake of possible changes to MiFID II and an extension of the tick size regime to systematic internalisers (SI), periodic auctions and block trading venues.
BlackRock expressed major concerns in a recently published whitepaper that European Union policymakers are increasingly focused on shifting trading activity towards lit venues, and strongly disagreed with assumptions that this shift improves transparency and price formation.
The investment firm’s report warned the current debate around extending the tick size regime to SI quotes of all sizes, price improvements and execution prices, as proposed under the Investment Firm Review (IFR), could have major implications on midpoint trading.
“It is critical that these amendments do not interfere with an investor’s ability to execute at midpoint, which is essential for implementing investment decisions cost efficiently and keeping European equity markets globally competitive,” BlackRock stated.
“Systematic internalisers should be able to execute trades against their own capital at the midpoint, with full adherence to the tick size regime. This is particularly important for large-in-scale orders… The tick size regime should not interfere with investor’s ability to execute at midpoint even when this is a half tick. This is an essential feature for matching buys with sells fairly, and is common practice in markets globally.”
Midpoint trading occurs when buyers and sellers match orders at a midpoint price, providing savings relative to the best bid and ask prices on an exchange. The activity occurs on block trading platforms, periodic auctions and within SI venues.
BlackRock added that while it supports MiFID II’s ban on SIs crossing client-to-client flow as riskless principal in order to create a level playing field, SIs should be able to execute trades against their own capital at the midpoint, particularly for large-in-scale (LIS) orders. At the same time, the asset manager said that it agrees the tick size regime should be amended to enforce quoting in round ticks to remove trivial tick increments that provide little benefit to end investors.
“As policymakers consider amendments and clarifications to the MiFID regime, any changes should allow midpoint executions to take place across all venues. We recommend clarifying that execution at EBBO (European best bid and offer) midpoint is permitted when quotes adhere to the tick size regime,” BlackRock’s whitepaper concluded.
BlackRock is not the only market participant to have spoken out about the current threat to midpoint trading. Speaking to The TRADE in October about the SI regime under MiFID II, Matthew McLoughlin, head of trading at Liontrust Asset Management, expressed concerns around the potential changes to the tick size regime.
“The regulators have been looking at extending the tick size regime to cover SI flow, so price improvement could soon be a thing of the past,” he said. “There is a danger that this gets extended to LIS venues and periodic auctions, which would prevent a large amount of mid-point trading. This is definitely not in the best interests of investors.”
At the same time, Ben Springett, head of European electronic and program trading at Jefferies, stressed the importance for the industry to protect being to trade at midpoint.
“It’s a very valuable option for a range of different venues that use if it for a wide range of market participants, and is well established as a go-to option for many of the largest asset managers across the Continent,” he said.
Similarly, the Association for Financial Markets in Europe (AFME) co-authored a report alongside the London Stock Exchange and Cboe Global Markets last year, which said that applying the tick size regime to LIS orders and SIs could be massively detrimental to end investors.
“It is essential that institutional and retail investors seeking execution of orders can do so at the midpoint of the bid-ask spread,” the report said. “The midpoint is understood and accepted globally as a fair execution price, and European markets would be materially harmed (and out of step with global markets) should the ability to execute at the midpoint be constrained.”
AFME, LSEG and Cboe urged EU policymakers to consider that the application of the tick size regime is only relevant to below SMS (standard market size) executions, but almost always below LIS.