[ N E W S
T
he world’s largest asset
manager has spoken out
about the potential threat
to midpoint trading in the wake of
possible changes to MiFID II and
an extension of the tick size regime
to systematic internalisers (SI),
periodic auctions and block trading
venues.
BlackRock expressed major
concerns in a whitepaper that
European Union policymakers are
increasingly focused on shifting
trading activity towards lit venues,
and strongly disagreed with as-
sumptions that this shift improves
transparency and price formation.
The investment firm’s report
warned the current debate around
extending the tick size regime to SI
quotes of all sizes, price improve-
ments and execution prices, as pro-
posed under the Investment Firm
Review (IFR), could have major
implications on midpoint trading.
“It is critical that these amend-
ments do not interfere with an
investor’s ability to execute at
midpoint, which is essential for
implementing investment deci-
sions cost efficiently and keeping
European equity markets globally
competitive,” BlackRock stated.
“Systematic internalisers should
be able to execute trades against
their own capital at the midpoint,
with full adherence to the tick
size regime. This is particularly
important for large-in-scale (LIS)
orders… The tick size regime
should not interfere with investor’s
ability to execute at midpoint even
when this is a half tick. This is an
essential feature for matching buys
with sells fairly, and is common
practice in markets globally.”
Midpoint trading occurs when
buyers and sellers match orders at
a midpoint price, providing savings
relative to the best bid and ask
prices on an exchange. The activity
occurs on block trading platforms,
R E V I E W ]
“It is critical that these amendments do not
interfere with an investor’s ability to execute at
midpoint, which is essential for implementing
investment decisions cost efficiently.”
BLACKROCK
periodic auctions and within SI
venues.
BlackRock added that while it
supports MiFID II’s ban on SIs
crossing client-to-client flow as
riskless principal in order to create
a level playing field, SIs should be
able to execute trades against their
own capital at the midpoint, partic-
ularly for LIS orders. At the same
time, the asset manager said that it
agrees the tick size regime should
be amended to enforce quoting in
round ticks to remove trivial tick
increments that provide little bene-
fit to end investors.
“As policymakers consider
amendments and clarifications to
the MiFID regime, any changes
should allow midpoint executions
to take place across all venues. We
recommend clarifying that execu-
tion at EBBO (European best bid
and offer) midpoint is permitted
when quotes adhere to the tick size
regime,” BlackRock’s whitepaper
concluded.
BlackRock is not the only mar-
ket participant to have spoken
out about the current threat to
midpoint trading. Speaking to The
TRADE in October about the SI
regime under MiFID II, Matthew
McLoughlin, head of trading at
Liontrust Asset Management,
expressed concerns around the
potential changes to the tick size
regime.
“The regulators have been
looking at extending the tick size
regime to cover SI flow, so price
improvement could soon be a thing
of the past,” he said. “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 definitely not in the best inter-
ests of investors.”
At the same time, Ben Sprin-
gett, head of European electronic
and program trading at Jefferies,
stressed the importance for the
industry to protect being to trade at
midpoint.
“It’s a very valuable option for a
range of different venues that use
if it for a wide range of market par-
ticipants, and is well established
as a go-to option for many of the
largest asset managers across the
Continent,” he said.
Similarly, the Association for Fi-
nancial Markets in Europe (AFME)
co-authored a report alongside the
London Stock Exchange and Cboe
Global Markets last year, which said
that applying the tick size regime
to LIS orders and SIs could be mas-
sively detrimental to end investors.
“It is essential that institution-
al and retail investors seeking
execution of orders can do so at the
midpoint of the bid-ask spread,”
the report said. “The midpoint is
understood and accepted glob-
ally as a fair execution price,
and European markets would be
materially harmed (and out of step
with global markets) should the
ability to execute at the midpoint
be constrained.”
AFME, LSEG and Cboe urged EU
policymakers to consider that the
application of the tick size regime
is only relevant to below SMS
(standard market size) executions,
but almost always below LIS.
Issue 59 // TheTradeNews.com // 19