July 21, 2020

SI’s: The Good, The Bad and The Ugly

Over the past two decades one of the major changes in market structure has been the proliferation of different types of trading venues. This week we are going to look at Systematic Internalizers (SI’s), a trading venue (of a sort) which has becomes part of the European trading environment post MiFID II.

This week’s highlights:

  • There is significant difference in execution style, execution size and information leakage both between different types of SI’s (Bank versus Non-Bank SI’s) and within the same type of SI.
  • There is greater information leakage among Non-Bank SI’s. Especially for less liquid names.
  • To an extent market segmentation has taken place among SI’s. Some SI’s are “full-service” executing in multiple ways, while others are targeting a specific niche for certain types of trades.

Across all asset classes, there are now 223 SI’s registered with ESMA. Most are fixed income, but approximately 80 SI’s trade equity. Although SI’s originated in 2007 under MiFIDI, their growth did not take off until MiFID II mandated the closure of BCN’s (Broker Crossing Networks) as trading platforms.

Under MiFID II a trading venue is a platform that brings together buyers and sellers in financial instruments. Broadly speaking, MiFID II divides the world into:

  • Multilateral trading, which is trading on trading venues, (Regulated Exchanges and MTFs such as the LSE, Turquoise, Liquidnet) and;
  • Bilateral trading which is when two counterparties trade directly with each other. SI’s are a type of bilateral trading, although like exchanges and mtf’s, SI’s must send out quotes prior to executing.

The public policy rationale for SI’s is two-fold:

  • to make over the counter (OTC) trading activity –i.e. trading which takes place outside a trading venue –more transparent,and;
  • to level the playing field so that rules followed by trading venues and investment firms which trade on their own books outside a trading venue, are reasonably similar.

To continue reading, click here.


By Henry Yegerman, ISS LiquidMetrix

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