Redefining Regime Won’t Prevent SIs Increasing Market Share

Following the European Commission’s proposal to redefine Systematic Internalisers, Michael Horan, Head of Trading Services at BNY Mellon’s Pershing, has made some comments:

“The European Commission (EC) is seeking to address an unintended consequence  of  MiFID II rules which prevent banks, operating as Systematic Internalisers (SI), from directly matching their clients’ orders.

“A late stage Delegated Act proposes to redefine the SI regime to remove ambiguity in the rules enabling SIs to operate networks deemed not in the spirit of MiFID II. SIs are currently aiming to connect with other SIs to match their client orders, without become multilateral trading facilities and incurring additional regulatory requirements.

“Exchanges stood to lose out from the potentially significant shift to dark trading this would encourage, but redefining the SI regime is unlikely to stop the trend.

“SIs are not subject to the MiFID II tick size regime, which provides them with more flexibility to see and improve upon public pricing. Therefore, while the EC could rule out interconnecting, SIs remain set to take an increasing percentage of trading volumes.

“SIs will stream prices to clients and have the flexibility not only to update quotes at any time, but in certain cases, trade orders at a better price than the streaming quote. Banks operating SIs are unlikely to share their feeds with other banks, but will do with agency brokers. This could mean brokers are more likely to achieve best execution through SIs, driving greater order flow to dark venues.”