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Traders warned not
to become reliant on
RFQs after MiFID II
Overuse of RFQs risks information leakage epidemic in 2018.
B
uy-side firms should be wary
of overusing requests for quote
(RFQs) to evidence their best exe-
cution once MiFID II comes into
force on 3 January 2018, according
to a panel of experts.
Panellists said that while RFQs
could offer good proof of best
execution, there is a risk they will
be overused by firms attempting
to play it safe in the early days of
MiFID II.
Julie Beecher, an independent
buy-side consultant, told the con-
ference’s best execution session:
“RFQs make it easier to evidence
best execution but they also make
a lot of noise and risk moving the
market.”
Fabien Oreve, global head of trad-
ing at Candriam Investors, agreed,
adding: “RFQ is becoming very
popular and is a good development
for the industry, but you need to
be very careful how you use them
because there is a higher level of
information leakage. Educating
traders on when it is appropriate to
use an RFQ will be important.”
The panel believed that, immedi-
ately after MiFID II is introduced
there could be a spike in RFQ
usage by firms taking a cautious
approach to compliance, but hope
it will come down as firms realise
that information leakage is acting
against their goals to achieve best
execution.
Risk trading was also raised, with
the panel saying that any firm that
only trades on risk could fall foul of
regulators.
Ben Stephens, head of business
development at Instinet Europe,
said: “You always need to ask if it
is better at this time to trade on
risk instead of in the market. Each
counterparty has something to
offer and if a risk trade offers you
a better price at the time than you
can get in the lit market then you
absolutely should be trading on
risk in that situation.”
Alasdair Haynes, CEO of Aquis
Exchange, added: “Risk is abso-
lutely critical in every market but
you should never use it for every
trade. Providers should give their
clients access to as many liquidity
pools as they can, but we also need
to recognise it is impractical to tap
into every pool with an expected
50 systematic internalisers in the
market next year.”
One panellist also warned that
the industry needs to consider
carefully how it applies transaction
cost analysis (TCA) to non-equity
asset classes as a way of achieving
best execution.
Beecher explained: “Fixed
income needs to take a different
route to equities, with more inno-
vation. TCA happened in the equity
world and the equity approach to
execution changed to fit it, I don’t
think it would be appropriate for
that to happen in fixed income, it
needs its own unique approach.”
Oreve said that as more data
becomes available under MiFID
II the fixed income market will be
able to improve its execution qual-
ity, but acknowledged that it faces
its own unique challenges.
What we need is for asset manag-
ers to develop new TCA partner-
ships that will look at a broader set
of solutions to support multi-asset
class trading.”
Issue 54
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