Fidessa, the provider of trading technology, has launched a service to allow to block trades to be simultaneously posted on a number of venues as new caps on dark pool trading in the European Union are expected to boost periodic auctions and large in scale trades.
To encourage trading on lit venues, MiFID II places double caps of trading in dark pools of 4% of the total volume over the previous twelve months on a single venue and 8% across all EU trading venues. There are waivers for large-in-scale (LIS) orders and trading in auctions which has led to a boost in volumes of block trades and periodic auctions. MiFID also prohibits broker crossing networks so that firms have to set up systematic internalisers in order to provide risk capital that facilitates trades.
James Blackburn, global head of equities product marketing at Fidessa told Markets Media that market participants now need to monitor and interact with a complex array of trading venues - lit, dark, conditional and SIs - in addition to their traditional sources of liquidity.
Fidessa’s new BlockShadow service has been developed with its client Redburn to enable the institutional broker to successfully interact with the growing number of conditional block trading venues that have emerged under MiFID II.
“Clients can place simultaneous LIS orders on conditional venues and at the same time time work an order in lit markets or via an SI,” Blackburn added. “BlockShadow has a dynamic allocation so if the order is matched on a lit venue, the conditional orders are reduced and if there is a match on a conditional venue then volumes are pulled from lit venues in less than half a second.”
BlockShadow can place LIS orders on Turquoise, the multi-lateral trading facility owned by the London Stock Exchange, Cboe Europe and Euronext. Blackburn added that Posit, the MTF owned by independent broker ITG, should be added in the near future.
Will Winzor-Saile, execution architect at Redburn, said in a statement: "Since going live with BlockShadow the additional volume from Turquoise, Cboe and Euronext has meant larger fill sizes, reduced market impact and better performance across all of our trading."
The European Securities and Markets Authority published its calculations on the double volume caps on 7 March, with six-month suspensions going into force 12 March for 755 securities, including 685 deemed liquid by Esma. The suspended stocks can still be traded in a dark pool if the size is above the large-in-scale threshold; via a systematic internaliser where risk capital in involved; or on a lit venue, including randomised auctions.
Blackburn said: “With the double volume caps in place the buyside needs to access every available liquidity pool as fund managers take control of execution decisions.”
In order to increase access to available liquidity, Fidessa announced a partnership last month with Virtu to connect clients to the Virtu SI. The electronic market maker’s customisable SI price feeds are integrated to Fidessa’s smart router and market access so they can be consumed as if they are additional venues alongside traditional sources of liquidity. In addition, Fidessa’s order handling enables users to manage order flow across all the venues that have emerged under MiFID II.
“Clients can choose which venues they want to interact with and in which order based on their execution policy,” added Blackburn. “BlockShadow generates an audit trail for MiFID II best execution requirements and allows firms to differentiate the service they provide.”
Esma said it intends to publish the applicable double volume cap data for March on 9 April 2018. Blackburn continued that if more stocks are suspended, this will further boost auctions and LIS trades. “We wanted to support periodic auctions, SIs and conditional venues,” he added.
Cboe Europe reported that its Periodic Auctions book set a new one-day record of €582.8m ($723m) yesterday, the first day of the double volume caps. The previous one-day record was €488m on 6 February 2018.
Mark Hemsley, president of Europe for Cboe, said in a statement: “With the double-volume caps now in effect, the Cboe Periodic Auctions book is well-poised for continued growth as market participants seek to trade in venues that provide minimal market impact. Additionally, the Periodic Auctions book is a good solution for firms looking to meet their best execution requirements under MiFID II as all orders submitted to the book execute at or within the European Best Bid or Offer.”
Consultancy Tabb Group said in its European Equity LiqudityMatrix that on the the first day of the caps dark MTFs accounted for 6% of order book activity, compared with 9% so far in March so far.
“It is worth noting that volumes on order books were subdued on March 12, at just under €40bn,” added Tabb. “Whether this is just a temporary fall in volumes as traders get used to the new rules – similar to what happened at the start of January when MiFID II first took effect – remains to be seen.”
The consultancy noted that will be interesting to watch which venues – lit markets, LIS venues, SIs or periodic auctions – benefit most from the dark pool caps, and what happens to volumes overall.
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Tabb noted some venues that do not have a compelling enough proposition to warrant connectivity under MiFID II. “This is not confined to venues; there has been a whole host of new services tied to MiFID II, ranging from reporting services to online research platforms, that require a critical mass of clients to survive, and for them the next few months could prove make-or-break,” added the report.