The various types of block trading venues have evidently come out as winners as a result of the post MiFID II market structure. The buy side are generally expecting that MEP Markus Ferber’s recent statement around broker preferencing in periodic auctions is likely to result in an adjustment to support improved price formation. A ban on such practices however is not desired. The sell side are increasingly challenged in Europe by the impact of the new market developments:
In addition to trading more blocks with MTFs direct, the buy side are generally trading a larger share of broker flow algorithmically with lower execution fees.
Unbundling of research from execution has lead to a higher scrutiny of what the buy side will pay for and who they will pay.
There is a tendency among some of the buy side to start evaluating to trade direct with certain Electronic Liquidity Providers (ELP SIs).
Not surprisingly the net effects are already seen with the increasing juniorisation of the sell side. Something that will likely result in even less execution commission payments being paid unless the sell side representative can add incremental value to the trading desk. Listing what every buy-side trader can see in the Bloomberg terminal at a morning call doesn’t necessarily add any value to the buy-side trader. With a battle between sell-side firms to remain on top, the buy side are tightening their due diligence process and constantly evaluating how new scenarios are adhering to the inducement rules (hear K&KGC's update at our next equities ATF - see dates below).
The buy side are challenged with the paradox balance between higher demands of due diligence of their broker selection at the same time as many counterparties are contributing with less value. The buy side therefore feel inclined to maintain their long tail of ad-hoc specialist brokers in their authorised counterparty list but naturally they may fall off over time as it may be too expensive for the brokers to sustain unprofitable relationships. Observing this trend with a magnifying glass, K&KGC anticipate that large-scale brokers with evidently heavy investments in machine learning and other deep learning technologies will capture the electronic low touch part of the market and those brokers maintaining high service levels with experienced sales people will have a better chance winning in the high touch part of the market.
Larger buy-side firms have already started investing in algo-wheel technology to reduce broker bias and as a basic form of automation of low ADV trades to free up the trader’s time for high touch trading. K&KGC’s buy-side community have identified 3 suppliers of this technology to date and the buy-side’s message to them is to integrate Machine Learning in the next generation of algo-wheels to make them smarter and responsive to market changes.
Despite a vast amount of data, the output of TCA tools is under scrutiny. With a lack of standardisation, huge differences in pre-trade results between different providers is tarnishing their credibility. How is the buy-side trading desk supposed to know which brand to trust when the results are unsystematic?.
While there are both interesting and new technology developments on the market, the buy side are currently also frustrated with their chosen OMS vendors often being the show-stopper for adopting new innovations. So what happens next? The discussions are to be continued so stay tuned….