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looking for in an ELP SI, and this means offering
liquidity across a large and diverse securities universe.
This is an easy one to quantify because the informa-
tion is available on the quote streams. With quantity of
liquidity, it is via quote sizes. To Matt’s point, we are
not going to be two-way in every single stock all the
time in all sizes, but what we will do is offer a quantity
of liquidity that matters to the buy-side. It all boils
down to those three and making sure that brokers and
the buy-side are aware of the different ELP SI models.
Citadel Securities obviously only represents one type
of ELP SI, but there are other types of SIs out there as
well.
Regarding quality of liquidity, measuring the price
impact following an SI trade remains the key focal
point for many discussions. Ideally, the focus would
be as an A-B test per market maker, but realistically
this would not be practicable. Focusing on fill level
analysis would help the buy-side and sell-side deter-
mine which market makers unwind positions quickly
and which ones risk warehouse positions. One point
worth noting is that we are talking here from a
Jefferies and Liontrust perspective, but brokers are
evaluating these factors very differently depending
on their interactions with market makers. It remains
difficult for the buy-side to become aware of what a
good evaluation and a bad evaluation actually looks
like, so again, the more we can talk about it the more
we can move into a standardised framework for eval-
uating these factors.
HM: What are your thoughts around SI price improve-
ments sub-tick above SMS and the European Commis-
sion’s recent take on the tick-size regime for SIs?
BS: We do not factor marginal improvements in, it
doesn’t mean anything for us. We believe it could po-
tentially create the wrong incentive, and I think risks
in efficient market structure. In Europe a few years
ago when we saw the dawn of fragmentation in lit
markets, we saw tick-size competition taking place
between primary exchanges and alternative
venues, but I think the industry did a very
good job of self-policing that and coming
to a harmonised tick-size regime. Mi-
FID II of course has a harmonised
tick-size requirement for trading
venues, so the industry is un-
der regulatory pressure
74 // TheTrade // Winter 2018
to conform with the regime more
widely. I think potentially antag-
onising the regulator by offering
fractional tick price improvements
is not very productive.
MM: From the buy-side’s per-
spective, a tenth or twentieth of
a tick price improvement is not
something we are looking for. The
regulators have been looking at
extending the tick size regime to
cover SI flow, so price improve-
ment could soon be a thing of
the past. There is a danger that
this gets extended to LIS venues
and periodic auctions, which
would prevent a large amount of
mid-point trading. This is defi-
nitely not in the best interests of
investors. I’m pretty comfortable
with the tick size regime being
expanded to include SIs, however,
because it’s not a driver as to why
I’m trading with them in the first
place.
BS: Yes, it’s very important as an
industry that we protect being
able to trade at mid-point. It’s a
very valuable option for a range of
different venues that use if it for a
wide range of market participants,
and is well established as a go-to
option for many of the largest asset
managers across the Continent.
HM: How do you see relationships
between brokers, the buy-side and
market makers evolving in future?
JF: I would say the SI regime has
achieved one of the key goals of
MiFID II, that being increased
transparency albeit on a bilat-
eral basis. For the first time, the
buy-side and sell-side can isolate,
identify and ultimately evaluate
each individual market maker on