Liquidnet, the non-displayed multilateral trading facility (MTF) for equity block trades, has stated that a trio of proposals in the MiFID review could significantly raise trading costs for its institutional investor clients.
In its response to the MiFID consultation undertaken by the European Commission (EC), which ended on 2 February, Liquidnet raised concerns about the proposals to publicly display stub orders, enforce pre-trade transparency for actionable indications of interest (IOI) and impose a minimum size threshold for those using the reference price waiver.
“We can see no public policy benefit in the three proposals we and our institutional clients are concerned about,” said John Barker, head of international, Liquidnet. “Liquidnet is very different from other dark MTFs, given its institutional focus and much larger average execution size, and we and our clients are concerned about unintended negative consequences from these proposals.”
In its current wording, the EC's proposal on stub quotes and actionable IOIs would have an adverse impact on Liquidnet's business model, which matches buyers and sellers using a negotiation process.
“When our customers engage in one-to-one negotiations through our MTF, our understanding from discussions with our regulators is that our customers are displaying actionable IOIs to each other,” read the Liquidnet response. “This would not be permitted under the proposal in the consultation.”
“The proposal on ”actionable IOIs' would prevent institutions from negotiating blocks directly with other institutions. We believe this is unintentional and should be fixed,” said Barker.
In Q4 2010, Liquidnet reported that its average execution size in Europe was €995,844, 116 times than the London Stock Exchange average trade size of €9,012 and 126 times larger than the €8,244 average found on NYSE Euronext.
Stubbed out
For stub orders, i.e. portions of a block that remain unexecuted after an initial trade, the EC has proposed that these be displayed publicly instead of remaining dark.
According to Liquidnet, enforcing transparency of stub quotes could cause market impact for institutional clients from both exposing part of an order to a number of brokers and for investors that have multiple blocks of the same stock to trade.
In addition, as the stub would no longer be suitable for execution in a block trading venue, institutions also face paying higher commissions from having to use another broker to execute the stub.
Liquidnet suggests in its response to the EC that, “Provided that the original order sent by an institution to a marketplace qualifies for the large-in-scale waiver, the stub also should qualify, as long as the stub results from a partial execution of the larger order.”
Calls for a size limit for the reference price waiver from the European Parliament, the Federation of European Securities Exchanges and the EC, have been met with criticism from many market participants.
The reference price waiver allows investors to forego pre-trade transparency requirement as long as stock price are based on a reliable reference price.
Recent research from Credit Suisse and ITG found that executing small orders in the dark can provide price improvement over displayed markets.
Given its focus on block trades, Liquidnet primarily uses the large-in-scale waiver – which allows pre-trade anonymity if orders are over a pre-defined size – but does use the reference price waiver for orders that fall below this threshold.
“We can say generally that imposing a minimum order size for the reference price waiver could impede our ability to provide 100% price improvement for customer order, depending on how a minimum order size provision is formulated,” read Liquidnet's submission.