Order flow from broker crossing networks (BCNs) will not shift to systematic internalisers (SIs) immediately following MiFID II implementation, according to market participants.
Speaking at The TRADE’s MiFID II Checklist event this week, a panel discussing changes to trading venues explained to delegates the liquidity from BCNs will likely be spread across multiple venues.
“Once BCNs are banned, it will leave a big hole in liquidity,” said Tom Stenhouse, head of products at the London Stock Exchange Group.
“It’s unclear how much flow will go to other venues and the difficulty is working out which of those venues are relevant and whether the liquidity pools are pre-matched,” he added.
MiFID II will see multiple new venues become available including SIs, although market participants have predicted the regime and additional venues will cause greater fragmentation.
Certain investment banks are also registering multiple SI platforms for different internal purposes, for example different desks offering liquidity in cash or derivative products.
Michael Horan, head of trading at Pershing BNY Mellon, added once BCNs are broken up, order flow will likely be rehoused as an MTF but most banks do not want to do that.
“That flow has to go somewhere and some will naturally migrate to lit order books, temporarily at least. The break up of BCNs isn’t about what choice the banks have, it’s about what happens to that mammoth piece of liquidity once it is broken up,” he told delegates.
Matthew McLoughlin, head of trading at Liontrust, agreed and added SIs will not replace BCNs once MiFID II is implemented.
“People underestimate the flow that goes through electronic market makers. There’s a place for SIs but with all the new venues coming out of MiFID II, no one venue will replace BCNs,” he said.
An SI under MiFID II and MIFIR is an investment firm that deals on its own account by executing client orders - on an organised, frequent and systematic basis - outside of a regulated market, multilateral trading facility or organised trading facility.