French regulator says SIs contribution to transparency is very limited

Analysis by the AMF found just 22% of the amounts traded by SIs in the continuous trading phase are subject to pre-trade transparency.

Systematic internalisers (SIs) have limited impact on transparency in European markets as the bulk of transactions are not subject to pre-trade transparency requirements, a study from the regulator in France has said.

The Autorité des Marchés Financiers (AMF) analysed the role of SIs in French equities in terms of weight on market structure, and contribution to pre-trade transparency, price discovery, and price improvement, when compared to exchange Euronext.

According to the study, transactions subject to pre-trade transparency requirements represent just 22% of the amounts traded by SIs during the continuous trading phase, or just 1.4% of the total amounts traded on the market during the period. The AMF described the contribution of SIs to transparency on buying and selling interests in the market as therefore ‘very limited’.

The AMF also observed that a significant 40% of volumes currently on SIs are traded at a price that will not be possible under the tick size regime. SIs will become subject to the tick size regime in June after a delay to enforcement due to disruption caused by the coronavirus pandemic. The move could dampen price improvement for SIs, the AMF warned, as 43% of improved prices in the first quarter this year were less than one tick and so were not compliant with the regime.

There was a total of 36 active SIs on the French equity market in the first quarter this year, consisting of 28 bank SIs and eight electronic liquidity provider (ELP) SIs. Bank SIs accounted for around 76% of volumes and ELP SIs account for around 24%. The AMF valued the market share of SIs at between 15% and 20% of the total amounts traded in shares, which it said is ‘higher than expected’.

An SI deals on its own account by executing client orders outside of a regulated market, multilateral trading facility (MTF) or organised trading facility (OTF) under MiFID and MiFID II. The regime requires firms to assess whether they are SIs for various assets on a quarterly basis, based on data from the prior six months of activity. If firms exceed thresholds from the calculations, they are considered an SI under MiFID II and have to fulfil SI obligations.

While a limited number SIs were already in operation under MiFID, banks and market makers operating SIs once MiFID II came into force surged. The recent review of MiFID II in Europe has also targeted SIs, with the European Securities and Markets Authority outright asking market participants if they should be removed under the share trading obligation.

Asset managers and heads of trading largely rejected the bid to ban SIs as part of the review, instead highlighting to authorities that SIs are critically important to European markets.

“We strongly oppose the removal of SIs as eligible execution venues for the purpose of the share trading obligation,” BlackRock said about the issue. “Systematic Internalisers play a crucial role of providing principal liquidity for large trade sizes. This is vital for investors both in calm and in disrupted markets. For that reason, it is essential to safeguard SIs.

“We understand that there is concern around the role that SIs play in the market ecosystem and questions around transparency. These are best addressed by strengthening the SI’s ability to provide meaningful principal liquidity.”