BREAKING THROUGH. 

Citi has risen in the ranks to the top three on Greenwich Associate’s electronic trading survey. Jack Vensel, explains how the firm plans to keep its top position and the challenges for the industry overall.

Q. How do you feel MiFID has changed the trading landscape?

A. The adoption of MiFID in 2007 accelerated the pace of change in trading. What took 10 years in the US took three in the UK and Europe. MiFID increased competition and helped compress bid/offer spreads. Although overall it had a positive effect, there have been unintended consequences. It has made everyone’s jobs more challenging, but also when MiFID was first implemented three years ago the market conditions were very different than they are today. Volumes were growing and it was much easier to justify the necessary investments in infrastructure. It is more difficult to invest in infrastructure when volumes are falling.

Q. What have been the positives of MiFID and those unintended consequences?

A. Fragmentation, which was expected, has been a positive outcome in that it has led to better prices and lower costs to execute trades. It also helped to promote innovation throughout the industry. However, one of the main problems has been the lack of a consolidated time and sales tape. There has been a proliferation of market data sources of varying quality, which has resulted in the unintended consequence of lower quality and higher costs for pan-European data. This has meant that firms are having a harder time than ever figuring out what the actual price is and are having to pay more to get a consolidated view of European data. There is a lot of work being done within industry groups as well as pressure on the regulators to come up with a cost effective and viable solution.

Q. What do you think about the MiFID review on dark pools?

A. There has been quite a lot of focus on dark pools with reports from the FESE (Federation of European Securities Exchanges) claiming that that as much as 40% of European trading is taking place away from exchanges. I think the active figure is far less. For example, the OTC market includes quite a lot of “give-up” trades – (trades done that are simply reported, perhaps as a result of some multi-legged derivatives transaction).

In general, the European Commission Consultation Paper released 8th December shows that the European Commission understands the difference between broker crossing systems and MTFs. They recognise that finding the natural other side of an institutional client’s order is a traditional function of the broker dealer. The Commission also recognises that broker crossing systems play a useful role in the markets. The idea of providing more visibility on a post- trade basis is interesting and should be explored further, taking into consideration the needs of both the institutional community and the regulators’ desire for more transparency.

This is a good and fair place to start the debate, and I applaud the Commission for seeing through much of the hype and misinformation put out by groups and individuals interested in preserving the status quo.

Q. Can you tell me the drivers behind your own dark pool – Citi Match?

A. Citi Match was originally developed in the US about three years ago and we launched it in Europe in April 2009. The goal is to provide institutional clients anonymous access with a broad universe of retail, institutional, principal and broker-dealer liquidity that Citi is able to generate and attract. Our clients benefit from having the first opportunity to trade against all the flow.

We designed the platform with the institutional client as the main focus. They know that they get best execution because in our system the institutional order always takes priority. If they match against another institutional order they match at the mid-point, whereas if they match against another source they can get 100% of the spread. I can show them the execution versus the European best bid and offer on a trade-by-trade basis. Our priority is protecting our clients, and as a result we have complete control over access to our dark pool. Different customers trade differently. Some are happy resting an order only in our dark pool, while others will instruct us to seek liquidity in other dark pools. The key is to provide our clients with the tools they need in order to meet their best execution obligations. Citi Match is one of those tools.

Our clients also benefit from access to Citi Execution to Custody (E2C), (an integrated electronic execution and custody solution available in most major equities markets). Citi E2C combines electronic execution and smart-order routing to achieve best execution while using the custody capabilities of Citi’s Global Transaction Services unit to reduce settlement costs, automate settlement processes and provide post-trade asset servicing.

Q. Looking at other kinds of traders, what do you think about the focus on the high frequency trading end of the spectrum?

A. High-frequency traders have been in the news especially after the May 6th flash crash. There are several misconceptions about who these traders are and what they do. Some view them as day traders on steroids who are predatory and distort the markets. The problem is that high-frequency trading is too broad a categorisation. They cannot be lumped into one group because for many their goal is to capture the spread, which does provide liquidity to the markets. High-frequency traders have helped cause bid/ask spreads to compress, which benefits retail investors.

Q. There is also a great deal of focus on the clearing and settlement space. How do you see the industry developing?

A. Although there have been several discussions about mergers between clearing houses, we are actually seeing the opposite happening and an attempt to return to the vertical silo. NYSE Euronext recently announced the launch of two clearing houses – one in Paris and one in London while the London Stock Exchange has announced a desire to do the same. This raises the question of the viability of having so many models in a space which is commoditised. I think in the long run it will make sense for them to consolidate. MiFID may encourage competition but from a clearing perspective it is much more efficient and less expensive to clear and settle trades in fewer places.

Q. Looking ahead, what are your challenges and future plans?

A. The biggest challenge is to keep the momentum going. Citi Match is the largest dark pool in Europe (according to Rosenblatt Securities). We have moved up four places in the Greenwich Associates electronic trading survey in two years, reflecting that our clients have recognised the value we provide. We have also doubled the size of our sales trading team, enabling us to be more proactive. We have also strengthened our algo products team, more than doubling headcount in the same period. Our clients have recognised the value we bring and we want to continue to build upon that.

Our future plans include building and growing a global wholesale (broker-to-broker) business, providing multi-asset algorithms to our clients, continuing to offer a truly global platform to our institutional clients. We hope we will continue to be seen as agents of positive change in the markets.