[ I N - D E P T H
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S Y S T E M AT I C
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Hayley McDowell: One year on from MiFID II implemen-
tation, how have you found the systematic internaliser
(SI) landscape evolving from an execution perspective?
Ben Springett: We have a more holistic view of how
the execution landscape has evolved because it is not
possible to determine the impact of the SI landscape
in isolation. How you would use SIs is partly down
to which avenues you have available to execute at a
certain point in time (volume caps, order size etc.) as
well as what other liquidity is available in the market
at that time. However, looking solely at SIs, it’s clear
that there are two very distinct flavours.
First of all, you have the broker SIs which have
replaced the broker crossing networks (BCNs). I would
say that functionally we use broker SIs in the same way
we used to use the BCNs, and I think the initial focus
from operators has been on replicating historic match-
ing capabilities in the new regulatory landscape, often
times utilising a combination of an SI and a periodic
auction on a member preference-basis. The second type
of SI is the market maker, or electronic liquidity pro-
vider (ELP) driven SIs, which are certainly a new dawn
for us on the European trading landscape, albeit the
liquidity provider operators were active in multi-lateral
venues previously. These single dealer pools have been
prevalent in the US previously, and as they have come
into Europe they have elegantly met the definition of an
SI as the legislation would expect them to look.
We’ve had almost 12 months of ELP SI usage in
some cases, and it’s clear that not all are created
equal. There are different firms, offering prod-
ucts with different strategies behind them
that you should view differently. When
you go to an ELP SI you need to have a
clear view of how they operate, and
we have been able to build up a
meaningful amount of data on
the variety of ELP SIs that
we currently use, which
we use to inform our
future usage. Part
of that is initial-
ly deter-
mined by
how the
op-
70 // TheTrade // Winter 2018
erator describes their model to us
- maybe they propose to have low
short-term impact because they
have a longer holding period or a
natural risk offset available to them
from other strategies. In other cas-
es you expect to have more short-
term impact because they are very
much a short-term market making
operator, but until you see the data,
you don’t really know.
So, we have been building a
dataset across a number of pro-
viders and that has informed our
current adoption levels along with
consultations with clients. Over
the course of the past few months
we have seen an increase in the
number of clients that are opting in
to use these services, but Jefferies’
default position is to have them
switched off for clients. I think that
a level of maturity and understand-
ing has been reached, and people
have had the time to digest and
we’ve also got more data to share
with our clients.
Matthew McLoughlin: We have a
variety of fund types and trading
strategies, so we have used a num-
ber of the new and pre-existing
venue types so far this year. I have
been pleased with the innova-
tion that we have seen from both
brokers and execution venues.
In aggregate we are reasonably
happy with our experience from
liquidity and reversion perspec-
tives, although we have been quite
selective with the venues we have
interacted with. We really tried to
understand each venue in terms
of what they offer and the model
behind that before we switched
them on for trading. In general the
buy-side is now comfortable using
conditional or large-in-scale (LIS)
order books and, now that we have
more information about them,
periodic auctions for orders below