Both on panels and in private meetings, the proposed not-for-profit equity trading platform backed by a consortium of banks and money managers was a subject on everyone’s lips. Plato plans to launch an equity platform for large-sized trades at the end of this year, and will also help fund academic research.
Neil Bond, head trader and partner at Ardevora Asset management, described it as a “private members’ club” and said that similar initiatives in the past, had failed to take off. Adam Toms, chief executive of Instinet Europe, asked why Plato was being launched when there was a ready-made system up and running: Turquoise’s Block Discovery service. BDS is an electronic service designed to encourage block trading that is supported by several brokers, including Instinet.
Toms said: “Why can’t we make Turquoise Block Discovery our focus? Clients and brokers need to get behind that initiative properly.”
But others believe Plato is just one of many solutions that will come out of Mifid II to satisfy the buyside’s need for bigger orders. Mike Bellaro, global head of trading at Deutsche Asset Management, which is one of Plato’s backers, said there needed to be a return to “old-school block trading”.
The SI regime
Mark Hemsley, chief executive of Europe’s largest stock exchange Bats Chi-X Europe, said the “function of the systematic internaliser will determine the future of [bank-run dark pools]”.
The SI regime was created under the first version of Mifid to capture client orders that banks execute using their own capital. Brokers typically do this in two ways: either using risk, by taking a position onto their books in the hope that a matching offer appears later in the day, or through a “riskless”, or matched, principal model, whereby they have opposing orders arriving at a similar time.
However, most brokers have exploited loopholes to avoid establishing SIs and, instead, launched unregulated “broker-crossing” networks, or BCNs
Mifid II will effectively ban BCNs through a trading obligation that will force most trades to take place either on an exchange, a multilateral trading facility or an SI.
The worry for exchanges is that it might be business as usual if brokers use the SI regime to continue operating a BCN-like platform, to capture client trades executed though a riskless principal model, where they are not using their own capital. The exchanges argue that such trades should be on exchanges or MTFs, and contribute to price formation. The industry is awaiting final guidance from the European Commission on the matter.
Commenting on the SI regime, Fabio Braga, a technical specialist at UK regulator the Financial Conduct Authority, said there were “some tensions in Mifid II which need to be clarified”.
Markus Ferber, a German parliamentarian involved in the implementation of Mifid II, kicked off a debate on dark pools by describing the volume caps designed to curtail them as something that would “not function” properly.
The rules will cap at 4% the amount of trading in a stock that can take place in one dark pool, and at 8% across all dark pools on a rolling 12-month basis. Should the caps be breached, that stock would be banned from trading in the dark for six months. However, so-called large-in-scale orders would be exempt from the caps.
The LSE unveiled new research at TradeTech (see below) that found that if the caps had been in place last year, all but one of FTSE 100 stocks would have breached them, as would about half of the FTSE 250.
Dale Brooksbank, global head of trading at State Street Global Advisors, described new rules on research payments as a “seismic” shift for the European equity market. Mifid II will force asset managers to make separate payments for research for the first time. The intention of the new rules is to end conflicts of interest, create a more competitive research market and reduce overcapacity.
Richard Semark, a managing director in the equities division of UBS, said the changes would “ultimately result in less production of research, and a concentration in the supply of that research among bigger firms”.
Juergen Verschaeve, chief investment officer at KBC Asset Management, said the era of brokers “carpet-bombing firms with research has gone”. Verschaeve said his firm “made a call” after the first version of Mifid in 2007 to move to a fully unbundled model for trading and research payments. Since then, he said, the firm had reduced its research fees by around 50%, as it more closely scrutinised payments. Verschaeve said that while KBC’s fees to independent research providers had increased, the firm had developed internal research teams to help reduce its reliance on external providers.
One consequence of Mifid II’s rules on research will be a renewed focus on the costs of execution, experts said. Guy Sears, a director at buyside body the Investment Management Association, said that “all the industry would be talking about in 12 to 18 months is the quality and price of execution”.
Michael Seigne, head of European electronic trading at Goldman Sachs, cited the example of pricing for capital commitment, where a bank takes a position onto its own book in order to provide a client with instant liquidity. He said pricing that type of execution would be a “very complicated process, as not everyone executes in the same way”.