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.”
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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
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