MiFID II - a catalyst for innovation

Trading in auctions – in contrast to continuous matching – has long been poised to grow under MiFID II, due to the technicalities in the pre-trade transparency regime and its waivers. With the go-live date edging ever-closer, the regulation has become a catalyst for innovation instead of being merely a cost of doing business. Exchanges are currently rolling out new and pioneering trading services that are not only compliant, but that will hopefully also make trading more efficient.

Some exchanges are using auctions in a straightforward setup to execute firm orders. Nasdaq’s Auction on Demand and the Periodic Auctions book offered by Bats are two such examples. The obvious difference between them is in their names – Bats follows a periodic schedule, while Nasdaq will trigger auctions dynamically – but the really interesting differentiator is the priority when allocating the execution volume. While Bats applies the classical logic of price / size / time, Nasdaq offers internal (broker) / size / time. The latter implies that if a broker wants to match two orders (e.g. two different clients or client vs house) then it can do so and no other firm can step into that trade.

Other exchanges are focusing on conditional orders, trying to build larger blocks. These include Turquoise Plato Block Discovery and the Bats Large In Scale Service. Another initiative expected to launch mid-year is Euronext’s Block Trading MTF which aims to build those blocks by providing the capability to proactively solicit the other side of the block trade and so increase the chance of matching.

Obviously all these matching models differ in terms of timeline, scope, legal and technical implementation, but their existence is evidence of our industry’s ability to keep innovating in the face of new regulation. Only today, Plato and Turquoise announced their plans to develop a new Event on Demand mechanism aimed at improving liquidity opportunities in SME securities.

With so much choice on offer it is now up to the market to pick its favourites.