THE MIFID II ROADMAP.

Rob Boardman, CEO of ITG Europe, spoke to Best Execution about the challenges of MiFID II.

MiFID II covers a massive range of compliance issues, what is top of mind right now?

The industry has got a tough timeline to comply by the 3rd of January, and one of the biggest issues for asset managers is clearly the separation of research and trading. At the moment, it’s an administrative burden, and in some cases it threatens their competitiveness, particularly when competing against asset management groups outside Europe. We believe ultimately it will allow traders to be unconstrained in their ability to buy the right execution product from the right source, trading in the right venue, and it will leave portfolio managers unconstrained to buy research from whoever they want. Eventually it will be seen as being beneficial to all sides, but in the short term the transition in modifying business models is clearly a challenge.

How do you see market structure changing?

We think there will be more large in scale (LIS) crossing, which is not capped by MiFID II. We have applied for and received permission to use the LIS waiver, which will allow us to continue to trade blocks in the dark.

There will be a series of other innovations in systematic internalisers (SIs), which the banks will be doing. Instead, we are focussing very much on the technology to provide best access, including to systematic internalisers and their capital.

The third great plank of interest for asset managers is how best execution will evolve. And I think it will evolve in many ways; it will certainly be adapting to the new market structure landscape, but also I think the bar will be raised, from the expectations of compliance from regulators to how asset managers pursue best execution. They now no longer have an excuse of having to trade with research providers, so they should have a complete, razor focus on best execution.

How are you helping clients to prepare in the equity space?

We are developing tools and technologies. Workflow technologies to allow asset managers to demonstrate best execution through analytics, but also through enhancements to their process to use a series of providers and measure that performance at the same time. And, to be able to engage in a systematic, unbiased engagement of brokers to demonstrate best execution.

Looking across assets, what is changing?

There are the new transparency requirements for derivatives and fixed income. It’s less clear to the market how that is going to shake out. We have a request-for-quote (RFQ) platform, principally for equity derivatives, called RFQ-hub, which we plan to enhance to give traders additional facilities to meet their MiFID II obligations. As to enabling our clients to be compliant, we think that could happen in different ways, in different product lines and that the market needs different solutions.

It’s less clear than in equities, the extreme example being fixed income, where the transparency requirements are really around quoting, because it’s a quote-driven market. Many attempts have been made to move liquidity onto more displayed markets but none have really succeeded.

There is still unfinished business with MiFID II, and I think multi-asset is clearly one of those areas. We will have to wait and see how regulators and policy makers react to the changing landscape. I think they will be surprised by how many new venues are born.

How will the shifting landscape affect where people trade?

Some banks are trying to promote the view that market makers will take over the market again; we don’t believe that’s true. Exchanges’ market share will not be affected. There is already a significant over-the-counter (OTC) market in pan-European equities – estimates are around low 20% of the market. Now, in some of the OTC trading, there will likely be a move onto more organised facilities – SIs for example – but we see OTC remaining important.

SIs do not have to have a rulebook in the way that a multilateral trading facility (MTF) or a regulated market would need. They can treat customers differently, so there is quite a lot of scope for creativity amongst the SIs in permitting different types of interactions; some of them will specialise in large or small transactions or different market segments. So, I think there is likely to be great differentiation amongst the SIs that will become clear through usage. We intend to provide investors with the best access that we can to all the liquidity sources, and we intend to measure them and have systematic processes to help them demonstrate best execution.

Which tools do you see trading desks needing to navigate this new environment?

It’s demonstration of execution quality that is important. They now have compliance and internal audit asking them to demonstrate why they picked a strategy with a broker, and traded on a given venue on a particular date. Having a systematic process is, we believe, going to be important for asset managers.

We could be in for a new era where asset managers are not just trading with relationship counterparties. They will have a broker list like they always did but they will also have a methodology for why they picked those brokers, and why they should be on the list, and who should not be on the list as well as making changes periodically. Having a static best execution process and policy is out the window. I think the regulators have made it very clear that they expect to see those policies and procedures reviewed and updated regularly.

So, will data become much more important to the buyside trader?

We think of this as an entire cycle of analytical data that we and others in the market try to provide asset managers. Decision support tools can provide details around likely impact, around which strategies or brokers have been more successful in the past, and classifying those transactions on the basis of liquidity or volatility. That then gives you the confidence, whether you make a decision yourself or through a machine, to place that order in a certain way, with a certain strategy and with a certain broker. Comparing the result with pre-trade estimates when you have finished the execution cycle then gives you a post-trade analysis. This can be daily, monthly and at quarter-end for bigger, more in-depth analysis looking for more trends.

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