European exchange Equiduct has released the third in its series of white papers on MiFID. The latest paper, called “Market Transparency: Making Unfilled Orders Public”, has been written by Andrew Simpson, a management consultant who specialises in capital markets.
The paper considers the impact that MiFID will have on the estimated 50%
of trading that is carried out off exchange by retail service providers and soon-to-be systematic internalisers (SIs). It highlights some of the key challenges that SIs may face post-MiFID and also indicates some of the concerns that the need for pre-trade order transparency could cause for these major market participants.
The paper examines how investment firms that trade from their own order book may face a significant challenge to their profitability post MiFID – one that may only be solved by their ability to react extremely quickly. Andrew Simpson believes that ultimately it will be those firms with very fast and agile trading systems that operate with extremely low latency who will benefit, along with those market participants who can offer exchange services that meet the needs of both on and off order book quoting.
The paper also investigates the role that algorithmic trading systems might play in a post MiFID market, suggesting again that speed will be of the essence and that the expected increase in market transparency could create a rise in algorithmic trading at the expense of market making.
“It is increasingly clear that MiFID will place considerable pressure on the
significant volume of OTC business currently conducted, and will impact the flexibility that traders have when it comes to managing risks and offering competitive prices,” says Bob Fuller, CEO of Equiduct. “Andrew Simpson’s white paper highlights this potential reduction in profitability, and suggests that the only way to combat this will be through the adoption of very fast automated solutions to the detriment of traditional manual trading processes.”
“It is important not to underestimate just how much business market makers carry out away from exchange order books – either on a bilateral or negotiated basis. It is business that is fundamental to the market, and an area that is likely to be significantly affected by the introduction of MiFID,” adds Simpson. “In producing this next Equiduct sponsored white paper, I have tried to focus on the potential impact for firms and the risk assessment changes that will follow as orders are made public in a transparent MiFID market.”