Financial research firm TABB Group interviewed 43 global heads of trading at hedge funds, asset management and private wealth firms in the US, UK and Europe on how they plan to adjust to the latest MiFID proposals and whether regulators will succeed in bringing back the block.
The research showed that 67 per cent prefer finding natural blocks than relying on a choice of venue, broker or strategy. However, according to Rebecca Healey, a TABB Group consulting analyst and author of the report, only a third are moving from schedule-based trading back to blocks. She says: “While many claim to want to trade blocks, it remains elusive, often a problem of perception versus reality. With increased market volatility, the ability to discover block liquidity has never been more critical yet harder to achieve, forcing market participants to rethink trading strategies.”
According to Healey, continued overall decline in the use of risk capital means buy-side firms will have to improve information flows rather than rely on their broker to deliver natural business. She writes: “The ability to receive and consume accurate indications of interest (IOIs), as well as measure and monitor the value individual brokers provide, occurs at a time when most are highly sceptical of the information they receive. There is also pressure with inclusion of IOIs as possible market manipulation under the European Market Abuse Regulation (MAR).”
The report finds that European regulators have now indicated their intention to protect institution-sized business by excluding large-in-size orders from a number of rules related to pre- and post-trade transparency (see RTS 1 and 2 under ESMA’s Regulatory technical and implementing standards – Annex 1), in particular, excluding transactions executed in the Large-in-Scale (LIS) waiver from controversial Double Volume Cap (DVC) mechanism to calculate dark volume trading. However, ring-fencing large-in-size orders for both equity and non-equity is just the first step in encouraging an increase in block activity. Liquidity may pool but it still needs to move, and the ability to facilitate trades in the post-MiFID II world is the ‘elephant in the room’.
Key findings from the TABB report include that facts that 54 per cent saw their use of capital continue to decline, year on year; access to natural blocks is now the most sought-after commodity sell-side brokers can offer, say nearly half and buyside-to-buyside crossing networks remain first port of call for 56 per cent but the make-up of what constitutes valuable buy-side networks is changing with new alternatives emerging.
Nearly half of those interviewed believe MIFID II will aid large-sized liquidity discovery, while 64 per cent have no concerns regarding the impact of the double volume cap on dark pool trading. Information flows remain valued with over 50 per cent placing importance on the level of consistency in Trade Ads and IOIs.
According to the report, some 70 per cent say IOIs should be included in market manipulation, while only 40 per cent took action against perceived misuse of IOIs by brokers.
“With increased market volatility, the ability to discover block liquidity has never been more critical yet harder to achieve, forcing market participants to rethink trading strategies,” says Healey.