By Mike Bellaro and Nej D’Jelal, Co-Chairs, Plato Partnership
As the current trading landscape transforms, it will be critical for the marketplace to deliver continual improvement and provide innovative solutions that address investor concerns.
Recent years have brought some of the biggest challenges ever to be faced by the global equity trading marketplace, with the Markets in Financial Instruments Directive (MiFID) II arguably representing the greatest single challenge in a generation. Institutional equity markets are a complex ecosystem and these changes have had a particularly significant impact on the buy-side’s experience of trading in size. It was in response to these challenges that Plato Partnership was born more than two years ago.
At its core, Plato Partnership (Plato) is about anticipating how trading is going to change, what impact these changes will have on end-investors, and how it can deliver the most successful and cost-efficient solution for the marketplace. There is a notable shift towards block trading, a trend that has taken shape during the past 12 months and will continue to emerge, with volumes increasing markedly as we approach MiFID II implementation.
Working in partnership
Since its inception, Plato realised that cooperation across the value chain was essential. Plato has brought together asset managers and broker dealers in order to identify the issues in the market that are having the biggest impact on end-investors. Crucially, not only have we brought together collective views of the market but we have created the vehicle through which real change can be explored and implemented.
Today, Plato consists of a wide range of market participants, from the largest firms on both sides of the trade to newer entrants, infrastructure providers and suppliers. In March, it announced 15 new Plato partners, joining the 16 founding members from both the buy- and sell-sides. This breadth and depth of membership ensures we identify the pressing issues and bring creative solutions as quickly as possible.
Turquoise Plato for automated block trading
It was clear to us, given the performance benefits of block trading and MiFID II’s recognition of these benefits, that one of the strategic priorities was to produce an automated block trading mechanism.
We recognised in Turquoise an established, automated block trading mechanism in the form of block discovery. Turquoise Plato Block Discovery has matched over €18 billion since its 2014 launch, of which more than €14 billion or 78% has been matched since the September 2016 announcement of Plato Partnership’s cooperation agreement. Every month in 2017 has seen Turquoise Plato Block Discovery register volume highs.
These figures showcase the emerging shift towards increased block trading in the years ahead. This growth has in fact not surprised us and underpins the rationale behind Plato Partnership’s cooperation agreement with Turquoise.
While MiFID II represents one of the biggest challenges the market has faced in decades, and one that will have a profound impact on equity trading, a clear outcome will be a strategic move towards large-in-scale block trading. This shift can deliver significant performance benefits for end investors by delivering stronger implementation results and reducing market impact. The big challenge is to create a marketplace that is efficient and focuses on price impact and post-trade reversion.
Delivering successful block trading
The intention is to increase transparency, reduce trading costs, simplify market structure and support end-investors. We are working with Turquoise to develop a mechanism that allows users to call an event on demand for less liquid securities, including small and medium-sized enterprises (SMEs), a vital driver of growth in the economy. Delivering Turquoise Plato trading innovations for small- and mid-cap SME securities will contribute to a more attractive capital raising environment for growth companies.
Furthermore, Plato has signed a cooperation agreement with LiquidMetrix, a best execution specialist, that will enable us to research, design and implement a stronger methodology for assessing block trade performance. This will allow firms to assess the execution quality achieved by block trading between different block venues and other execution options.
A separate cooperation agreement with Trade Informatics PLIA will allow Plato members to raise standards and better understand counterparty risk, in turn strengthening best execution processes. This partnership also has Trade Informatics supporting the work of our MI3 research incubator as part of this collaboration through shared revenue, which will ensure additional research can be undertaken by Plato to provide further direction around market structure simplification.
Collaborative research
The MI3 research incubator is only now getting started, with its first piece of rigorous research due to be published in June. This is fundamental to our model – we bring together all parts of the marketplace to identify the most pressing problems we face, we commission independent research working with the academic community in order to design solutions, and we then work as a group to deliver the change that will work in practice as quickly as possible.
A key part of the collaborative approach is to offer the forums through which all market participants can come together to discuss the issues that have the biggest impact on their activity. The first of these forums is taking place in May with our MiFID II Question Time, where more than 250 people will gather to hear from leading minds in the market and address some of the critical questions being faced by the buy-side as we approach MiFID II implementation.
By taking part in Plato our members ensure they have significant influence in shaping our work, which will have a notable impact on the future of equity market structure in Europe.
Any organisation interested in becoming part of Plato Partnership can register their interest via the website at www.platopartnership.com
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