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“Any time you have consolidation
with one or two firms providing all of
the liquidity, you’re more likely to see
short-term volatility.”
ROB D’ARCO, CEO, RIVAL SYSTEMS
new markets such as India.”
MiFID II bites
MiFID II is also expected to bite
the HFT industry hard. With
stricter rules around dark pools
and block trading, some foresee a
separation between HFT and low
latency trading among the big prop
shops.
“This trend is also likely to be
exacerbated by the new rules due
to come into force next year under
MiFID II. In particular, new rules
limiting the volumes of individual
shares that can be traded through
dark pools, the sort of venues HFT-
led trading strategies reply upon,”
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The Trade
Summer 2017
says Misys’ Farley.
“These will, in the future, have to
be broken up into more manage-
able blocks that keep transactions
below the new limits, removing a
valuable asset for HFT trades that
often rely on simultaneous execu-
tion in size to be effective.”
For market making post-MiFID
II, Farley explains some of the
HFT firms could be encouraged to
act as systematic internalisers (SI)
for certain instruments, including
derivatives. However, the problem
here is that they would not be
allowed to directly match buyers
and sellers.
“The consequence of this, howev-
er, could be the disintermediation
of many existing exchanges, some-
thing the authorities will not want
to see at a time where they are
encouraging more transparency by
forcing more OTC derivatives to be
traded over these venues for better
market surveillance,” Farley adds.
HFT firms based in the US are
also watching what is going on in
Europe with MiFID II, and are
preparing to make changes to their
strategy.
“There is a trend of firms getting
out of heavy technology invest-
ments because they have seen the
experience in Europe and they
want to limit their exposure to
regulation,” says Sylvan Thieullent,
CEO at Horizon Software.
“Instead they are moving more
into quantitative-based businesses
as opposed to speed, with a heavy
emphasis on forecasting analysis,
so there is definitely a change in
approach to technology for these
firms.”
Yet MiFID II is also presenting
some opportunities, especially
around agency execution and
research. On Virtu’s first quarter
earnings call, its CEO Doug Cifu
explained MiFID II and unbun-
dling requirements provided an
opportunity to expand in Europe
with the acquisition of KCG, which
operates an established European
market making franchise.
“Europe is one of the key moti-
vators for us wanting to get into
the agency execution business and
it was obviously our experiences
with order routing for our own
selves and how that value proposi-
tion really translated to the agency
business,” Cifu said.
“With the advent of MiFID II and