Within equities, we are hopeful that multilateral trading facilities (MTF) will continue to cover the Large-In-Scale (LIS) trades and the majority of the buy side understand now that they will need to place their full trading volume and start to aggregate orders to exceed the LIS threshold. K&KGC observe from recent buy-side discussions that exchange driven periodic auctions seem to be promising solutions for the sub LIS block volume. Depending on the region, K&KGC have also found that a varying degree of buy-side traders have indicated that they will solve the dark cap challenge by fragmenting their orders with trading algorithms. There are split camps among the buy side as to what extent they want to leverage systematic internalisers as of day one of MiFID II. Some will proceed with a 'business as usual' approach and adapt to the situation while others want to wait and see what happens. The best practice is that the buy-side should trade with the counterparties where they have accomplished proper due diligence. It will be interesting to monitor how the small/mid cap and emerging market specialist brokers will survive in the new market structure.
Regulatory trade reporting has initiated a heated debate within fixed income trading about the future of voice and chat negotiations. New regulatory standards suggest that the buy-side should avoid confirming a price negotiation with “Done” over voice but the formal agreement happens at the point the order is placed on an electronic system with a time stamp. The buy-side would also need Bloomberg to implement the correct agreement time stamps in their VCON. Most of the buy-side indicate that they will only want to trade directly with MTFs and vetted SIs under the new MiFID II regime. Hopefully there will be technical solutions that clearly indicate pre-trade what order size is required under the upcoming transparency deferral schemes. K&KGC is enthusiastically observing the buy side reporting progress of electronic trading initiatives for internal crossing and multilateral trading and this is something that we see will increase in focus in 2018.
Foreign exchange traders are hopeful that the new year, post MiFID II which has consumed disproportionate amounts of IT resources, will bring back the firm’s focus on improving their execution. The buy side are concerned about the broker oligopoly on the increasingly inefficient Forwards and Swap market and the buy side are keen to find resources and solutions for alternative ways of accessing liquidity. Is Futures an alternative to Forwards and why don’t we see any All-to-All trading initiatives in this space? Earlier, we already raised the concerns of the buy-side relying entirely on custodian directed FX and one of the sponsors at the 7th European Alpha Trader Forum Foreign Exchange in London also indicated that there is evidence to prove that trading FX T+1 to cover the FX risk in other asset classes is a risky practice where you may never recover from a single volatility event.