Brokers are failing to give investors best execution by being too reliant on historical market share trends, according to Aquis CEO and founder Alasdair Haynes.
In a letter due to be sent to market participants on Monday and seen by The Trade, Haynes said data from LiquidMetrix demonstrates that too many orders are being filled at venues that do not offer the best price.
“Under the forthcoming Mifid II, firms will be required to take ‘all sufficient steps’ to achieve the best possible trading results for their clients,” said Haynes. “This is an upgrade from Mifid I’s stipulation that firms take ‘all reasonable steps’. And yet, the fact remains that many brokers are not taking enough reasonable steps, let alone all sufficient ones.”
He highlights two examples where LiquidMetrix execution analysis found Aquis offered the best price in commonly traded names, yet other exchanges saw the bulk of trading activity.
During the week of 18 January 2016, LiquidMetrix found Aquis offered the best price on Rolls-Royce and Nestle more than any other exchange, yet it was placed 5th in market share at 1.35% and 1.29% respectively. Typically the listing exchanges, BATS Chi-X Europe and Turquoise take up the top spots in market share.
Haynes said many brokers are still using historical market share information to decide which venues to include in their smart order router (SOR) logic, and as such are not meeting their obligations to find best execution for their clients.
He explained: “a number of major banks and brokers have not integrated Aquis into their SOR and some are not even connected. These firms are focused on market share which has nothing to do with price, cost, speed or even likelihood of execution.”
On 8 January Aquis introduced new membership rules designed to limit access to members utilising predatory HFT strategies on its platform, saying they were detrimental to the market. Proprietary trading firms must now sign a Liqudity Provider Addendum, and approved market makers will only be authorised to trade passively.
The strategy is highly risky for Aquis and Haynes said he is expecting a short-term dip in market share but hopes it will enhance his proposition for institutional investors.
At the time he said: “I am convinced that we will see a short term decline in market share. But the ultimate gain is deeper liquidity. Buy-side firms like what we are doing, reducing market impact and trading a cheaper prices.
“We will see liquidity grow rapidly and then we will see market share growth. Once we hit 2%, other firms will have to become members.”