EC calls time on the broker crossing network – so what happens now?
Broker crossing networks will be heavily affected by upcoming European Commission rules on dark trading. But with 18 months to go until implementation, uncertainty still unnerves brokers and asset managers – prompting some market participants to re-examine whether they want to trade at all.
For the buy-side, securing access to a venue that has the right mixture of participants and liquidity is key. But for for Martin Henning, head of trading at BNY Mellon, that can be a challenge on some dark venues. Ironically, while many buy-siders often emphasise their desire to trade with other large asset managers, there can be a problem if only the buy-side is present at a venue. Speaking at the TradeTech conference in Paris this week, he said:”Where should the liquidity come from then? You do need brokers to interact and provide some liquidity.”
Others were very critical of the new rules, pointing out that limiting consumer choice could have a damaging impact on business. “If we’re forced to trade on certain venues it’s going to be more expensive to trade and ultimately, we all have to turn a profit to stay in business,” said Brian Pomraning, head of electronic client solutions at JP Morgan. “We are past the point of no return on the dark pool caps, and yet nobody seems to fully understand how they are going to be set up. How are we going to explain to clients why they suddenly can’t trade? There’s going to be a lot of education, a lot of challenges and a lot of costs.”
Under MiFID II, broker crossing networks will have to fit into one of three categories or cease doing business. Either they will need to become a regulated market, an MTF, or a systematic internaliser. All of these platforms are subject to limits on how much of a given stock can be exempted from pre-trade transparency. For some firms, that may mean their BCNs are no longer viable. For others, it may mean significant adjustments need to be made, but the lack of clarity on the final rules is causing frustration for many.
“It’s such a significant change,” said Adam Toms, chief executive Europe at Instinet. “To be 18 months out and not have significant clarity is really not great. We could be forced into making big changes which could have significant consequences for our cost of trading, which is going up. I suspect that wasn’t the objective of the regulator. We need clarification as quickly as possible.”
The resources required to adapt to regulatory change were another common point raised by market participants in objection to the new rules. Henning pointed out that his company has project teams to cover MiFID II, EMIR and other regulatory changes – but these inevitably detract from the firm’s ability to focus on other areas. “I have to take people off my trading desks for that,” he said. “It’s a lot of pressure for us to have pre-trade and post-trade rules implemented, especially given the time-frame.”
Regulatory pressure is also forcing some businesses to change their models. For example, the JP Morgan BCN and others like it face a choice of either becoming an MTF – which involves significant new obligations – or taking another course, such as finding some kind of partnership or alternative way to handle the flows. According to Pomraning, one such example is the Plato project, a consortium of asset managers and broker-dealers working to build a non-profit equities trading utility in Europe. JP Morgan is a member, alongside others such as AXA Investment Managers, JP Morgan, Union Investment and Fidelity Worldwide. The trading utility will be a one-stop shop for anonymous block trades and will be open to all market participants with the aim of reducing trading costs, simplifying the market structure, creating deep liquidity opportunities and delivering an equal trading experience for all market participants.
Plato Partnership says it will use the revenue generated from its trading utility to commission academic research focusing on better trade execution and lowering execution costs. The platform is an attempt to mutualise the governance of equity execution across its participants. Existing members include Deutsche Asset and Wealth management, Norges Bank Investment Management, UBS, Barclays, Citi, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley.
However, not everyone is convinced of the need for a new platform. For Toms at Instinet, the real need is for a venue that allows market participants to trade large blocks of stock while avoiding market impact. But arguably there are already platforms out there that provide such a service.
“Turquoise Block Discovery has already unlocked the answers people have been searching for,” said Toms. “We have an excellent opportunity with Turquoise Block discovery to execute at size. Its average trade size is significant – ten or twenty times the size on exchange – and it has conditional order types which is fantastic. Clients and brokers need to get behind that initiative to make it successful. So I ended up being a bit perplexed by Plato – why is Plato is any different? Especially when it looks like we’ve already got a pretty good pre-canned well designed service we can use.”
Turquoise Block Discovery has been championed by Robert Barnes, chief executive at Turquoise and former founder of UBS MTF, one of the first bank-owned MTF dark pools. Block Discovery is a feature of Turquoise’s own dark pool service, which has been growing since Barnes was named as chief executive in August 2013. Toms added that since around 70% of orders on that platform are greater than 25% of the MiFID large in scale waiver, and 30% are 80-100% the waiver, the key may be not to look at the execution but the actual orders that are submitted to the trading venue.
“There’s numerous statistics of orders being submitted above LIS in size into Block Discovery,” he said. “It’s pretty independent. It’s owned by LSE. It’s not owned by a large number of banks and brokers so it is quite interesting. Why can’t we make Turquoise Block Discovery our focus of attention and make that successful?”
Regardless of which venue eventually ends up handling the flows that are currently directed to BCNs, it seems likely that the buy-side requirement will remain much the same: a platform that can minimise price impact while maximising the available liquidity. But some asset managers are concerned about the priority the new European legislation places on redirecting buy-side flows towards the lit markets. Given a choice between transacting in disadvantageous conditions in the lit market, or simply withholding flow for a better opportunity, Henning is in no doubt.
“We have illiquid stocks where we don’t find the liquidity,” he said. “We talk to brokers. The sales trader comes in and finds liquidity for us. We say we are looking for big size. They let us know if they can help us. We won’t go to lit markets, we will always stay and wait until we get offered liquidity.”