Conference Dailys TRADETech Daily 2019 - Wrap-Up Issue - Page 10

THETRADETECH DA I LY in-depth THE OFFICIAL NEWSPAPER OF TRADETECH 2019 Demand for single-broker TCA dropping despite sell- side investment, says Citi market structure head THETRADETECH DAILY in-depth THE OFFICIAL NEWSPAPER OF TRADETECH 2019 ELP SIs opening access to liquidity despite industry transparency issues CITI’S MARKET STRUCTURE HEAD FOR EMEA SAYS THE BUY-SIDE NEED A MORE INDEPENDENT, MULTI-BROKER TYPE SOLU- MARKET MAKER-RUN SYSTEMATIC INTERNALISERS ARE BEDDING IN TO THE POST-MIFID II MARKET STRUCTURE BUT CON- TION. CERNS OVER TRANSPARENCY AND LACK OF DIFFERENTIATION ARE STILL LINGERING. C lient demand for single-broker transaction cost analysis (TCA) is dropping, according to Citigroup’s head of EMEA market structure, who believes the buy-side are after a seek- ing a more independent source. James Baugh responded to an audience poll which found con- sensus that a larger focus on TCA has been the biggest change in buy-side trading strategies since Europe’s new regulations took hold. “My sense is that a lot of banks and brokers spend time, effort, resource on TCA, and actually we’re seeing the converse in action, the demand of TCA from our clients is becoming less,” said Baugh during a panel session on changing market structure. “Clearly the buy-side need a more independent source of TCA, a multi-broker type solution. That in itself is quite inter- esting because there is juxtaposition of buy-side and sell-side and how we manage that.” A report from Greenwich Associates released on 9 April of just over 100 buy-side traders in Europe showed that 95% have been using TCA for equities, up from 75% two years ago. The paper concluded that “TCA will become even more import- ant and ingrained in the trading process going forward”. The introduction of MiFID II has been credited with fuelling a rise in TCA use in equities, far above its presence in FX and fixed income desks. James Hilton, head of sales EMEA, for Advanced Execution Services (AES) at Credit Suisse, suggest- ed that the provision and demand around TCA had shifted. “Less focus on us providing TCA and more focus on us going to the market with applications that improve performance,” he said. “It’s all about trying to find an incremental way of improving performance.” Speaking from the buy-side perspective, Lynn Challenger, global head of trading and order generation at UBS AM O’Connor, added that there is a internal shift to figure out how to “use this tool we’ve had on our desktop for the last ten years”. Following MiFID II, there is a wealth of TCA providers in the market, with many expanding into multi-asset. In a report from Aite Group towards the end of 2018, author Audrey Blater suggested the “TCA arms race will translate into more and better technol- ogy, benchmarks”. T “My sense is that a lot of banks and brokers spend time, effort, resource on TCA, and actually we’re seeing the converse in action, the demand of TCA from our clients is becoming less.” 10 THETRADETECH DAILY JAMES BAUGH, CITI he emergence of ELP systematic internal- isers (SIs) as a result of MiFID II has caused a significant shift in market structure for the better in terms of access to liquidity, according to panellists. While there are still concerns around the transparency of how SIs operate and how these mechanisms differ from each other, panel members said that progress was being made to address these issues. “All of the ELP SIs are genuinely different; some focus on market impact or size, some focus on specific parts of the stock universe. It’s really down to the broker to understand each SI’s characteristics, and use the right liquidity provider and match them with the right end user, to really curate that liquidity pool,” said Jigar Patel, global head of business development at XTX Markets. Patel observed that some brokers are further along this journey than others, while Citadel Securities’ director of European development, Jonathan Finney, said that brokers had become a key part of this infrastructure. ELP SIs seem to be winning over market participants after reaching record market share in February, according to an analysis by TABB Group. Total daily notional among the six elec- tronic liquidity provider (ELP) SIs that regularly report volumes to TABB Group reached €1.45 “It’s really down to the broker to understand each SI’s characteristics and use the right liquidity provider and match them with the right end user, to really curate that liquidity pool. JIGAR PATEL, XTX MARKETS billion in February this year, the highest level to date, compared to €1.12 billion in January. From the buy-side perspective, Liontrust Asset Management’s head of trading, Matt McLoughlin, said that ELP SIs are providing new options for liquidity and that most firms are now interacting with these entities, even if they have not connected bilaterally. “If you connect bilaterally, as we do at Lion- trust, you can benefit from larger size, better price while price improvement is still available before the regulators make their change, and also lower market impact, which is something that we value quite a lot,” he said. Although he acknowledged that ELP SIs were not the answer for every type of order, McLoughlin highlighted the importance of “leveraging the transparency we are in”, a point that was taken up by the other panel members. Simon Dove, head of liquidity management at Tower Research Capital Europe, explained how the firm had built its offering through a collaborative approach: “We give transparency around the kind of experience you are going to see on the SI and there is over a year’s worth of data driving that decision, which for me, is quite a proud moment.” Dove went on to say that criticism of the SI regime had allowed market makers to provide a greater level of transparency around how the mechanisms operated, the liquidity and technol- ogy involved. However, audience polls found that this sentiment may not be too widespread just yet: 56% of audience members said they are unsure of how ELP SIs differ from each other, 50% said the biggest challenge they faced was under- standing who they were interacting with, while 83% of audience members said they did not receive sufficient information on the mechanics of how SIs work. Issue 2 11