MiFID II’s SI regime to herald new age of fragmentation

Industry estimates on the number of registered systematic internalisers suggests the market will see fragmentation increase severely.

The controversial systematic internaliser (SI) regime under MiFID II has been tipped to cause a new era of market fragmentation, as the growth in applications to operate as an SI continues to accelerate.

Predictions on the number of investment banks and other liquidity providers suggest despite regulators’ best efforts, a surge in the number of SIs operating by January 2018 will exacerbate fragmentation.

Speaking to The TRADE, Rob Boardman, CEO at ITG Europe, predicted the number of SI registrations will continue to grow.

“We are expecting it to exceed 50 by 3 January 2018, perhaps even as high as 100. Certainly more than regulators intended. We believe clients will find it difficult to interact with them all without sophisticated aggregation technologies,” he said.

He added certain investment banks are also registering multiple SI platforms for different internal purposes, for example different desks offering liquidity in cash or derivative products.

A report by TABB Group published this month estimated the up to 20 SI operators for equity products alone will be registered come the January deadline, although only a handful will offer competitive prices.

Earlier this month, JP Morgan updated its application on ESMA’s database to operate an SI for cash equities and it is expected to soon apply to operate a further SI platform for fixed income.

Goldman Sachs, Credit Suisse, UBS, Deutsche Bank and others - some of which have been listed on the register since MiFID was introduced in 2007 - are also already operating several SIs ahead of MiFID II.

Furthermore, Morgan Stanley and Denmark’s Spar Nord Bank recently registered to operate as an SI prior to MiFID II in May this year, according to the regulator’s market identifier code database.

Steve Grobb, director at Fidessa, told The TRADE the regime will see greater fragmentation of liquidity, which is “the last thing the market needs”.

“It’s bad news for the exchanges as they will be forced to the back of queue and this is in contrast to the intentions of the regulators introducing this regime,” he added.

Industry experts have expressed growing concerns over the practical and technological implementation of the SI regime, with many buy-side firms hindered by legacy systems.

“We believe clients will find it difficult to interact with [all SIs] without sophisticated aggregation technologies.

“It also seems clear that not all of these platforms are created for the purpose of electronic streaming liquidity: some are for traditional capital facilitation by market-making desks,” said Boardman.

With less than five months until the MiFID II deadline, market participants remain unsure of the impacts of the regime.

Grobb added despite the lack of time, everybody continues to have a different view on the regime but have to build technology based on their own perception of how it will work.

“At Fidessa, we are tasked with connecting all of the market participants and we are often asked by clients to support completely different workflows. They are not on different pages, they are reading from completely different books,” he said.