Systematic internalisers (SIs) operated by market making firms under MiFID II traded close to €30 billion in the first quarter this year, despite reluctance from the buy-side to interact with them.
A recent report authored by TABB Group found that in total €27.9 billion was traded during the first three months of the year on market maker SIs, with around half a billion traded per day.
There are currently 50 SIs in operation under the MiFID II regime, eight of which are considered to be electronic liquidity providers (ELPs) or market makers.
Those SIs are operated by Citadel Securities, Jane Street Financial, Jump Trading, Sun Trading International – now part of Hudson River Trading – SSW Market Making, Tower Research Capital Europe, Virtu Financial and XTX Markets.
TABB Group’s research found that of those SIs, Sun Trading was the biggest during the first quarter in terms of value of transactions, followed by Tower Research, Jane Street, Virtu and Citadel Securities.
Despite market maker SIs currently accounting for a small 2% of order book trading, the research suggests that interactions with those SIs can in some cases can offer significant benefits to market participants.
“There is understandably a continued level of cautiousness from the buy-side, brokers and regulators towards this form of execution – and they should remain under close scrutiny in the weeks and months ahead,” said Tim Cave, TABB Group analyst and author of the report.
“However, early evidence suggests that interactions with ELP SIs can offer unique, larger-sized liquidity, with limited market impact. They are a welcome innovation in response to new regulation and emerging technologies, and have a role to play alongside other forms of execution.”
The SI regime under MiFID II has been a subject of debate prior to, and following, the introduction of the regulation in Europe on 3 January. Buy-side firms have reportedly been reluctant to use the venues, which are not subject to MiFID II dark pool caps, due to concerns around transparency.
Traditional exchange operators have expressed their own concerns around SIs as they are not subject to the tick size regime. They argue that this has led to SIs having an unfair competitive advantage due to their ability to provide potential price improvements.
The European Securities and Markets Authority (ESMA) has moved forward with plans to enforce the tick size regime on SIs following an industry consultation on the issue.
TABB Group added that market maker SIs have numerous challenges ahead in terms of winning over the buy-side and improving connections with brokers.
“Time will tell how big these SIs become, but estimates that they will reach 30% of the market look unlikely. Instead, they are likely to be one of many execution channels available for the buyside investor to opt into in the years ahead,” the report concluded.