Tighter rules unlikely to stem flow of dark trading to SIs

SIs under MiFID II will still be very attractive trading venues for investors even if EU stamps down on networking attempts.

Updated rules for the systematic internaliser (SI) regime are unlikely to prevent the venues from becoming major dark trading venues, according to Michael Horan, head of trading services at BNY Mellon Pershing.

The European Commission published delegated to amend parts of MiFID II, an unprecedented move to try and prevent industry moves to network SIs together in order to give them some of the same flexibility currently seen in broker crossing networks.

But earlier this year, the MEP who lobbied for the creation of the new SI regime, Kay Swinburne, told a TRADE event in London that networking SIs together to match client orders would go against the spirit of the rules.

Horan said redefining the SI regime would be unlikely to stop a major shift from broker crossing networks to SIs, as they still offer considerably more flexibility than other venue types.

““A late stage Delegated Act proposes to redefine the SI regime to remove ambiguity in the rules enabling SIs to operate networks deemed not in the spirit of MiFID II. SIs are currently aiming to connect with other SIs to match their client orders, without become multilateral trading facilities and incurring additional regulatory requirements,” he explained.

“Exchanges stood to lose out from the potentially significant shift to dark trading this would encourage, but redefining the SI regime is unlikely to stop the trend.

However, Horan added that SIs are not subject to MiFID II’s tick-size regime, giving them much more flexibility to improve pricing compared to other venues.

“While the EC could rule out interconnecting, SIs remain set to take an increasing percentage of trading volumes,” he said.

“SIs will stream prices to clients and have the flexibility not only to update quotes at any time, but in certain cases, trade orders at a better price than the streaming quote.”

He also believes the agency broker market is set to benefit from having full access to bank SI feeds, something bank brokers will lack, and best execution rules could drive a greater amount of flow to SIs and other dark venues as they will offer superior pricing.