Broker ITG has added to the innovations around electronic block trading for equities in Europe as the ability to trade large sizes will become more critical under new regulations.
ITG is adding the ability for the sellside to post conditional orders in Europe for its institutional block crossing network, Posit Alert. Buyside users who choose this feature will be alerted to block opportunities when matches are found, giving them access to additional liquidity and minimising market impact.
Duncan Higgins, head of electronic products for ITG in Europe, told Markets Media: “The new service is fully automated and monitored in real-time on a statistical basis to ensure that matches become firm orders and to address concerns about information leakage.”
ITG said the conditional order functionality can enhance the buyside block liquidity in Posit Alert, which averaged $18bn(€16.5bn) in indicated daily liquidity in Europe, Middle East and Africa during the first quarter of this year. A daily average of more than $440m was traded in Posit alert in the first three months of this year in Emea.
Conditional offers in Posit Alert are already available in the US and are being launched in Europe ahead of MiFID II, the European Union regulations, coming into force in January. MiFID II places double caps on the volume of equities trading in dark pools and brokers will not be able to cross internal flows without registering as a systematic internaliser. Venues can apply for waivers which allow large-in-scale trades, above a specified minimum size, to be exempt from both the volume caps and from pre-trade transparency requirements.
Higgins said: “Firms have been reorganising around blocks as they are aware the market needs more flexibility to trade large sizes.”
In February Euronext, the pan-European exchange operator, announced it has formed a strategic partnership with AX Trading, a US fintech company and ECN, to launch a multi-lateral trading facility for large-in-scale orders in European equities in the middle of this year. The new Euronext offering is an electronic IOI service with sophisticated analytics for measuring best execution. Danielle Mensah, head of cash markets at Euronext, told Markets Media at the time that institutional demand for executing in the dark and for large trades is as high as ever and there has been a shift to electronic block trading.
Rival pan-European exchange Bats Europe licensed technology from Bids Trading, the largest block trading ATS by volume in the US, to launch Bats LIS and asset managers now have direct access.
Last year Plato Partnership, the non-profit group, agreed a cooperation agreement with Turquoise, the multilateral trading facility majority-owned by the London Stock Exchange Group, to bring together the buyside, sellside and a trading venue and increase efficiencies in anonymous European equity block trading.
Turquoise rebranded its dark services as Turquoise Plato Block Discovery and Turquoise Plato Uncross. Uncross features random intra-day auctions which happen more frequently in more liquid stocks, making it harder for the auction to be targeted by aggressive trading strategies. Block Discovery facilitates trading in larger block orders by electronically matching block indications. On identifying potential matches, the service requires participants to send firm qualifying block orders to Uncross and their behaviour is monitored. The value of trading on Turquoise’s lit book was €1.2 trillion last year, up 26% year-on-year, while the value traded on the dark book was €159bn, an increase of a third from 2015.
ITG’s algos interact on a conditional order basis with Posit Alert when seeking block liquidity and two other conditional venues are available - Turquoise Plato Block Discovery and Bats LIS.
“Turquoise Plato Block Discovery volumes have increased significantly, with €1.7bn traded in January,” Higgins wrote in a blog. “Due to the significant liquidity, the low opportunity cost of conditionals and the low price reversion we have observed there, we will now add Turquoise Plato Block Discovery to our standard venue list on a conditional basis.”
He expects that more large-in-scale pools will emerge under MiFID II, more innovation in auctions and around how people deal with systematic internaliser liquidity.
Rebecca Healey, head of Emea market structure and strategy at institutional block trading platform Liquidnet, interviewed 53 European-based global heads of dealing last year. She found that nearly half of the buyside respondents plan to increase their proportion of large-in-scale activity post-MiFID II.
She said in a blog: “The challenge for the buyside is understanding how the demise of broker dark pools as we know them will impact the future dark landscape – particularly given that three-quarters of respondents stated they had either received insufficient or no information from brokers as to how their dark pools will evolve into systematic internalisers post MiFID II.”
In a blog on understanding systematic internalisers, Healey said an SI can undertake bilateral matched principal trading provided it does so on an occasional and not a regular basis. If a firm trades an instrument over-the-counter on an organised, frequent, systematic and substantial basis, based on specified criteria, they must become an SI in that instrument. SIs must not bring together multiple third party buying and selling trading interests in the same way as a trading venue.
“A firm is an SI in an instrument - not the firm itself,” she added. “SIs are prohibited from operating an internal matching system for matching client orders. SI activity is characterised by risk-facing transactions that impact the profit and loss account of the firm.”
Healey continued that SIs are not prevented from hedging positions arising from the execution of client orders as long as it does not lead to the SI de facto executing non risk-facing transactions and bringing together multiple third party buying and selling interests. Hedging transactions can be executed on a trading venue.
“All SI thresholds tests are average values across the previous quarter and the SI test applies for each instrument separately,” she added. “Firms will have to assess this on a quarterly basis using six months of "look back" data.”
