One major impact of the MiFID II regime was the way it opened up new electronic processes and alternatives to traditional bi-lateral high touch and block trading. With banks being pressured on profitability, it accelerated the juniorisation of the sell-side desks and the buy side need to scrutinise and adapt to the new service levels.
Calling out a few changes, one positive development to support bi-lateral high touch trading with Systematic Internalisers (SIs) is the improved perception of the quality of indication of interest (IoIs). Aggregating all the buy-side trader feedback from the local Alpha Trader Forums (ATFs) in each region in Europe, we can also verify the pre-MiFID II speculations that the regional small/mid cap specialists are now increasingly facing. Competition from global multilateral trading facilities (MTFs), high touch trading and seeking optimal partnerships and processes to access scarce liquidity with minimal market impact will certainly remain a focal point on the buy-side’s agenda.
Almost half of the buy side are ready to use the various Request for Quote (RFQ) services for equity trading. The RFQ services not only enable access for the buy side to CRB Systematic Internalisers (SIs) but also Electronic Liquidity Providers (ELPs). Anecdotally, a few buyside traders who attended the 18th ATF London Equities meeting have also reported that ELP SIs are gaining trust among the buy side for deals above the Large in scale (LIS) thresholds.
From a regulatory perspective we are, at the time of print, still waiting to hear the final outcome of the implementation of the tick size regime as well as calibrations to periodic auctions. It is no secret that LIS venues are doing well. The below illustrates the rationale as to why the buy side use block trading. These poll responses were sent by 44 senior, heads and global heads of buy-side trading at the 7th annual ATF global summit on the 6th February 2019.
The buy side articulated that better and more holistic data solutions is the critical component to improve fixed income high touch and block trading. More buy-side traders should step outside of their comfort zone and utilise all-to-all trading venues in addition to bi-lateral arrangements. Subsequently the buy side will need to adapt similar pricing tools as the sell side making price decisions. This is calling for a considerable behavioural change. The human element and utilisation of each trader’s time is a central theme. Smaller and highly liquid trades need to be automated and the buy side are increasingly extending their counterparty network outside of the traditional liquidity providers to market makers to optimise their time where it is best needed.