Ben Stephens, head of EMEA business development at Instinet, said the agency broker aims to be the destination of choice for aggregating sources of liquidity as the buy side faces increase choices in where, and how, to trade equities under new regulations.
MiFID II, the European ruleset which went into force this year, has led to asset managers having an increasing number of choices in how to trade to achieve best execution.
In addition to routing orders to dark pools, traders can use regulated markets or multilateral trading facilities who can both cross buyers and sellers and may benefit from pre-trade transparency waivers. Broker crossing networks have been banned and firms have been required to set up systematic internalisers. Firms must commit capital on an SI but can price improve relative to their published quotes and keep quotes private when they deal above a standard market size.
Stephens told Markets Media: “We aim to be the destination of choice for aggregating sources of lit liquidity and streaming indications of interest. Clients send us their order and we connect to myriad venues which rationalises settlement costs.”
In a white paper, Destinations of Choice Mapping the New Equity Trading Landscape, Instinet said the choice of execution venue depends on individual client requirements. “This explains the widely-distributed breakdown of trading styles in Europe, with around 43% of volume being traded via lit markets, over 40% via over-the-counter, and the remaining orders being completed via SI, auctions, and dark pools,” said the paper.
MiFID II also requires firms to annually disclose their top five venues/brokers for all trading on behalf of clients in the past 12 months in order to increase transparency. The first RTS28 annual reports published at the end of last month covering trading activity last year for asset classes including equities, debt, over-the-counter derivatives and structured products.
Tim Cave, analyst at consultancy Tabb Group on European market structure, analysed the RTS 28 reports for the 20 largest UK-headquartered asset managers and found that that the brokers mentioned with the most frequency in the top five were: UBS (16), Citigroup (13), Goldman Sachs (12), Liquidnet (10) and JP Morgan (9).
Cave added: “Those with the most number one rankings were: Instinet (4), Citigroup (3), Liquidnet (2), Morgan Stanley (2) and UBS (2)."
Stephens noted the agency firms in the top ranks. He added: “Others have been extremely successful at blotter scraping for their dark pools but our business model is different.”
He continued that Instinet’s approach is is to be a true agency broker with no proprietary trading and to form trusted relationships: “We can act as an outsourced dealing desk; as a liquidity aggregator; provide algos or direct market access. We have between 5.5% and 6% of pan-European equities trading."
MiFID II has encouraged trading in larger sizes and Instinet Europe added a request for quote capability for equities within its BlockMatch MTF in March this year. Instinet said in a statement this is one of the first RFQ venues created for trading European equities.
Stephens said central limit order books are most efficient for liquid markets where information is disseminated to everyone instantly but RFQs work well for less liquid securities. For example, he noted that there are 28,000 equities in Europe but only 1,500 to 2,000 are liquid and only 200 ETFs are liquid.
“Adding RFQ to BlockMatch enables clients to trade equities and ETFs in larger size, where capital can be put at risk, without having to register as an SI and also allows buyside-to-buyside trading,” added Stephens.
BlockMatch is also centrally cleared so trades can be shifted from the over-the-counter market, which is encouraged by regulators.
“We believe this fits well within the spirit of MiFIR share trading obligations, while at the same time giving our clients and members opportunities to benefit from automating the management of their liquidity,” said Stephens,
The trader can decide who, and how many, potential counterparties should receive an electronic RFQ depending on their preferences and the size of the order. They may find a match at a price other than a simple midpoint of the displayed quote and it may be more efficient for very large orders, where there is no displayed quote.
In addition to adding RFQs to BlockMatch, Instinet has formed bilateral liquidity streaming relationships to give clients opportunities for price improvement and larger size fills, which decreases market impact.
For example, in June last Instinet entered into a bilateral liquidity streaming relationship with Virtu Financial Ireland. Clients remain anonymous but the SI can offer price improvement and larger size to Instinet as a known counterparty. There are now another four SIs with similiar relationships according the execution policy on Instinet’s website - Citadel Connect Europe, Jane Street Financial, Sun Trading and Tower Research Capital Europe.
Richard Parsons, chief executive of Instinet Europe Limited, said in a statement last year: “By managing our clients’ interaction with many sources of liquidity in an anonymous manner, we can essentially personalise their access to the right counterparties in the most efficient way possible. It’s a win/win – this is good for Instinet’s clients and good for liquidity providers, alike.”
Stephens continued that algos will become more efficient in accessing aggregated liquidity using data and machine learning.
“There is an opportunity to further increase automation and the great leap forward will be in automating workflows,” added Stephens. “Asset managers currently blotter scrape venues while receiving indications of interest from banks and algos. We want to provide a single point of access where they are presented with order matches meeting their criteria and they can decide if they want to trade.”
He said MiFID successfully introduced more competition in equities.“MiFID II will be successful in introducing competition across asset classes as more than 100 MTFs and 100 SIs have been registered,” he added.