Buy-side Prepare for MiFID II

AXA IM’s Head of Trading, Paul Squires, shares his thoughts on how the buy-side are preparing for MiFID II.
What are the major concerns for institutional traders if broker crossing is limited or severely regulated so as to be less effective?
The major distinction which generally makes a BCN preferable to an MTF is the control that the operator can exercise over the type of flow that is given access. There are often multiple streams to the relationship between an asset manager and a broker and the shared objective is usually to optimize the execution performance of the client’s trades. As the operator of a BCN can closely monitor the impact (or ‘toxicity’) of flow that is allowed in, it is well positioned to govern any amendments that need to be made.
I think the intention to increase definition of different elements of flow that is currently found in a BCN (the initial ‘OTF’ recommendation) is the right one (and why not have three different types of ‘OTF’ category to add granularity to the different type of flow?) but to simply remove BCN as a category by applying the ‘OTF’ category only to nonequity instruments is a mistake. The ‘MTF’ alternative, by definition, means that there cannot be differentiation between access by market participant (for example all HFT would be allowed). Similarly unhelpful for the preservation of BCN activity is the SI structure which suggests continuous quoting of prices (‘market making’) which is quite separate from the potential of the BCN operator to unwind risk trades already executed or for ‘riskless principal’ trades.
How can systemic internalisers be tweaked so as to ensure transparency for all participants, while not inhibiting the efficiency of aggregation and internalization?
Good question! The SI category is still something that is surrounded by confusion as to what, in practice, it is meant to represent. If the intention is to create a level playing field and add transparency at the same time then it is commendable but in reality – and particularly if it is imposed inappropriately – it will deter competitive market making which has traditionally been led by brokers and further incentivize HFT ‘quote stuffing’ which gives the impression of adding liquidity and reducing spreads but often disappears at the point of execution.
FPL EMEA Regulatory Update
There is a considerable amount of activity taking place in the European regulatory environment and its impact is a central concern for many FPL member firms. As an organisation, FPL works closely with regulators globally to encourage the use of nonproprietary, free and open industry standards in the development of regulation, so all sectors of the financial community can benefit from increased consistency and transparency. The standards FPL promotes are those that have already achieved mass adoption by the trading community, enabling firms to more easily meet new requirements by leveraging existing investments across additional business areas.
FPL is increasingly approached to comment on regulatory consultations and in Q1 2012, reconvened the EMEA Regulatory Subcommittee, led by Stephen McGoldrick, Deutsche Bank and Matthew Coupe, Redkite Financial Markets, to ensure that all responses submitted strongly reflect membership interests. FPL welcomes participation in this group from all FPL member firms with an interest in the region, if you would like to find out more please contact fpl@fixprotocol.org.