SIs say future is bright under MiFID II regime

TradeTech keynote panel discussion suggests the buy-side is becoming more comfortable interacting with systematic internalisers.

Leading European systematic internaliser (SI) operators are optimistic on the future under the MiFID II regime despite signs of initial caution from the buy-side.

A keynote discussion panel at the TradeTech expo in Paris, with representatives from Citadel Securities, Goldman Sachs, Virtu Financial and HSBC, suggested the buy-side is now beginning to warm to the venue type just months into the regime.

“I feel clients are becoming more comfortable with the new regime and anecdotally, conversations with the buy-side suggest they are more comfortable interacting with external SIs. That is part of the conversation moving forward, profiling the right kind of risk for the right client and ensuring they are finding the liquidity they are looking for,” said Joelle Tarrant, head of market structure at HSBC.

Thomas Bourgeois, co-head of electronic and head of execution product strategy at Exane BNP Paribas, said: “It looks promising so far as a business in this space, we have our customers trust and performance and that’s how we navigate this space.” 

The panelists agreed that increased transparency and an overall “superior” execution quality compared to on-exchange activity has helped SIs gained the buy-side’s confidence.

“We engage with the buy-side a lot and it’s important they are comfortable,” added Remco Lenterman, global head of business development at Citadel Securities.

“It’s interesting because SIs are so transparent and they are showing and providing an execution experience superior to other methods of execution or venues. We have seen this in the US and expect to see this in Europe, the early indicators are very encouraging.”

Ralston Roberts, co-head of electronic trading for EMEA at Goldman Sachs told delegates the investment bank currently connects to five electronic liquidity providers (ELPs) including its own SI, providing a fairly broad set of liquidity decisions when it routes client orders, but improved execution quality.

“From a best execution perspective we see a superior execution quality and looking at the evolution of the mid-price after execution, SIs are far more superior to lit venues because lit markets move significantly after you trade compared to ELPs and SIs,” he said.

Exchange operators have long-argued that SIs have an unfair advantage over lit venues, claiming a competitive disadvantage would be created for trading venues if only on-venue orders and quotes have to comply with the minimum tick size regime. Exchanges argued this could result in volumes currently traded on-exchange migrating towards over the counter (OTC) execution.

“Some industry participants argue that there is an unfair advantage related to SIs, suggesting that liquidity is taken away from the regulated markets. The depth of our SI liquidity is not something that we would otherwise would able to provide on a central limit order book.” said Christiaan Scholtes, head of EMEA markets at Virtu Financial.

“And related to tick size improvements, the tick size debate is not so important to us. Our core SI strategy focus is not really around price improvements but more on size and availability.

The European Securities and Markets Authority decided it will enforce the tick size regime on SIs under MiFID II earlier this year, despite much debate around the issue.