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MiFID II Has Hampered Liquidity, Buy-Side Says
Traders Magazine Online News, May 16, 2019
Traders have adapted to the MiFID II regulations and are navigating the new European equity trading landscape. However, there have also been some downsides, including increased difficulty in sourcing liquidity and a shift away from Europe’s midsize/regional brokers.
A new report by Greenwich Associates examines the impact of MiFID II on Europe’s equity markets more than a year after the directive’s 2018 implementation. Of the buy-side traders interviewed, 44% say sourcing liquidity has become harder under MiFID II. Only 16% say these changes have made the job of sourcing liquidity for trades easier.
Pressure on Midsize and Regional Brokers
The MiFID II upheaval has shifted the flow of equity trading business among competing brokers. By severing the link between research and trading, the “unbundling” provisions of MiFID II allow firms to compete for execution business on the basis of their execution prowess alone.
“This naturally favors firms with a more advanced execution platform and puts pressure on those who were previously more dependent on their research product when it came to attracting flow,” says Richard Johnson, Vice President of Greenwich Associates Market Structure and Technology, and author of MiFID II Shapes European Equity Trading.
On the surface, this has led to somewhat predictable shifts in flow, with traders noting increased flow toward and specialist electronic brokers, who picked up an average 1.75% of market share in the past 12 months. On the losing side have been midsize/regional brokers, who lost about 4.3% of market share.
“European midsize/regional brokers will continue to face headwinds in this new regime and face a stark choice,” says Richard Johnson. “Invest more in their trading infrastructure to improve competitiveness of their stand-alone execution capabilities, or pivot away from trading altogether to focus on their core competency of research.”
Periodic Auctions and Other New Execution Options
MiFID II has required buy-side desks to reconfigure their trading strategies to adjust to the retiring of old venue types and the emergence of new execution types and platforms. For example, more than three-quarters of buy-side desks have started using periodic auctions, a relatively new construct for Europe that has flourished in response to MiFID II. Like exchange-operated open and closing auctions, periodic auctions aggregate liquidity during a call phase—when orders are submitted and then run—seeking to maximize the executed quantity. Forty percent of current users report having a good or excellent experience with periodic auctions, as opposed to just 7% with a negative opinion.
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