The MiFID and the Markets - Unleashing the Trading Forces September 2008 Mike Jones September 2008...
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Transcript of The MiFID and the Markets - Unleashing the Trading Forces September 2008 Mike Jones September 2008...
The MiFID and the Markets -Unleashing the Trading Forces
The MiFID and the Markets -Unleashing the Trading Forces
September 2008
Mike Jones
September 2008
Mike Jones
2
What is The MiFID about?What is The MiFID about?
The core LisbonThe core Lisbon
objectives objectives
.
Unifying EU countries around regulation, providing a single passport.Driving down the cost of capital
Customer protection
Greater transparencyAcross all trading activity
Ending the concentration rule to provide competition to exchanges
3
Trading structure and trendsTrading structure and trends
Regulation Regulation
.
-Exchanges-Multi-Lateral Trading Facilities-Systematic Internalisers-Centralised Counterparty Clearing-Settlement through Centralised Security Depositary Systems (CSD’s)
Buy side – Institutions and retail asset managers
Sell side – Institutional sales & trading
The trend is towards an increase in principal trading from 50% to 70% by 2015.Algorithmic trading is growing quickly in the UK – it accounts for 1/3rd of US trades (source IBM)
4
Receiving & Transmitting v Executing Receiving & Transmitting v Executing
BrokerBrokerFundFundManagerManager
MarketMarket
ClientClient ClientClient
Receiving & Transmitting –L2 Art 45
Best interestOf clients
Executing-L1 Art 21
Best outcomeFor clients
5
Where does Best Execution apply? – Cobs 11Where does Best Execution apply? – Cobs 11
Best ExecutionBest Execution
.
It applies inside or outside the European Community
It applies to all instruments, on and off market
Best execution exists when a contractual or agency obligation exists with a client
It applies to retail and professional clients, but not eligible counterparties
“A firm must take all reasonable steps to obtain on a consistent basis the best possible result for a client.The best possible result for a retail client is to be determined in terms of the total consideration, representing the price of the financial instrument and the costs incurred by the client related to execution.”
6
Prioritisation of execution factorsPrioritisation of execution factors
Best ExecutionBest Execution
.
Size
Speed
Cost
likelihood ofsettlement
Price
Liquidity
7
Best Execution steps Best Execution steps
StepStep 11: Selection: Selection of factorsof factors
StepStep 22: Selection: Selection of execution venuesof execution venues
StepStep 33: Linkage: LinkageTo execution venuesTo execution venues
StepStep 44: Execution: ExecutionOf orderOf order
Sort clients and instruments. Sort clients and instruments. Prioritise factors – price, Prioritise factors – price,
cost, speed, etc.cost, speed, etc.
Select venues for Select venues for ‘Best Possible Result’ ‘Best Possible Result’ on a consistent basison a consistent basis
All venuesAll venues
‘‘Best Possible Best Possible Result’ venuesResult’ venues
Best conditionsBest conditions
StepStep 55: Periodic: Periodic reviewreview
8
Markets MarketsMarkets
Recognised Investment Exchange (RIE)
Electronic market place providers
Systematic Internalisers
Regulated markets
MTF
Quote driven
ABN AmroDeutsche BankLehman BrothersMerrill LynchCitigroupUBSCredit Suisse
Order driven
Multi-lateral trading facilities(facilitates trades – is neither a buyer or seller)
London Stock ExchangePlus MarketsSWX Europe (Virt-X)
Chi-XEurex derivativesICAPCantorNYSE Euronext – AlternativeNasdaq OMXNyfix Euro Millenium (dark pool – Euro equities)Turquoise (September 2008)
Quote driven
Order booksAnonymous crossing systems
Quote driven (internalises client orders and cross against trading book)
9
London Stock Exchange – A Recognised Investment Exchange
London Stock Exchange – A Recognised Investment Exchange
LSE Tradelect services
SETS (a Regulated Market)Previously SETS/SETSMM
SETSQX (RM – previously SEAQ, Seats Plus
AIM – Exchange Regulated Market/MTF
Equities
-Eurosets – RM – Equities, order book and integrated market making – Dutch liquids - EQS – MTF – Equities – Quote driven Market making – EURM liquid securities-IOB – RM – Dep. Receipts – International order book
Equities & Fixed interest
FT All Share plus some Fledgling and AIM UK50
Quote driven market making
Equities
Quote driven together with periodic order book auctions
Equities & Fixed interest
Other services
SEAQ (MTF – previously SEAQ)
Order book and integrated electronic market making
Market Maker can enter 2 sided quotes using electronically executable quotesMM can deal off exchange as SI.Allows Limits, Iceberg, Market, Executable quotes.Trades novate to central clearing
FT all remaining main market, FT Fledgling, some AIM
Securities outside SETS and SETSQX, AIM
Uses SETS, SEAQQX, SEAQ
LSE SETS – an Order Driven systemLSE SETS – an Order Driven system
Here is an example of the order book in continuous trading mode:
Buy (Bid) Sell (Offer/Ask)Time Volume Price Price Volume Time
Order A 10:15 4,800 870 871 5,900 10:25 Order B 10:22 1,500 870 871 7,500 10:48 Order C 10:18 8,700 869 872 13,800 09:25
At 11:00 XYZ submits a Limit order to sell 10,000 shares with a limit price of 870. Two buyers are prepared to pay 870, which is the highest bid price on the book. The one on earliest gets first go, and 4,800 of XYZ’s shares are sold at 870, leaving XYZ with 5,200.
XYZ then sells 1,500 to the remaining buyer, who is prepared to pay 870.The bottom buyer now moves to the top of the book, but is not prepared to pay XYZ 870 – he would only pay 869. XYZ has 3,700 shares left, so XYZ now joins the order book himself, and goes straight to the top of the Sell side, as his selling price of 870 is more attractive to a buyer than the other sellers, who want 871 and 872.
12
LSE SETSQX – A mixture of quote driven & order drivenLSE SETSQX – A mixture of quote driven & order driven
Quote bookQuote book
----------------------------------------------------------------------
Order display which Order display which periodically uncrossesperiodically uncrosses
.
Market Makers enter orders to order book uncrossings
Settles outside CCP on a bi-lateral basis in Euroclear/Crest
Yellow strip shows best available bid & offer
Brokers telephone orders
Market Makers provide non-electronic executable quotes and liquidity
RSP Electronic quotes
Brokers’ electronic RSP gateway
Same order book technology as SETS, but not continuous order book execution. 4 uncrosses daily.
Orders executed electronically on the order book will be reported to CCP if the security is supported. Non-supported securities settle direct in Euroclear/Crest
Brokers enter orders – only named or anonymous limit orders – no market orders or iceberg orders
13
Plus Markets – a Recognised Investment Exchange, operating a Regulated Market and a Multi-Lateral Trading Facility
Plus Markets – a Recognised Investment Exchange, operating a Regulated Market and a Multi-Lateral Trading Facility
FTSE100FTSE100
FTSE250FTSE250
Smaller companiesSmaller companies
AIMAIM
European European
.
-Quote driven execution – telephone trading- Quote driven execution – electronic trading through RSP automated ‘RFQ’ services
Off exchange quotation facilities for Systematic Internalisers in liquid shares
10% share of FTSE Smaller Cap40% share of FT Fledgling50% AIM of UK retail market1/3rd
7,500 securities
Offers Protected Trades, i.e. MM accepts an order that is to be executed within a specified period on an improved basis.The trade must be of sufficient size end (minimum E45,000) to qualify for deferred publication up until end of MQP for current business day
MM will trade report (deals between non-mm members seller reports) through normal venues for that stock
14
SWX Europe (Virt-X) – a Recognised Investment Exchange, based in London, and regulated by FSA
SWX Europe (Virt-X) – a Recognised Investment Exchange, based in London, and regulated by FSA
Swiss blue chipsSwiss blue chips
Leading European Leading European blue chips blue chips
.
Clearing through LCH, Clearnet, SIS X-ClearSettlement through Euroclear, SIS Sega, SIS X-Clear
Order driven central limit order book
Operates a Regulated Market for Swiss securities, and is an MTF for non-Swiss securities
A wholly owned subsidiary of the Swiss Stock Exchange
15
Markets MarketsMarkets
Recognised Investment Exchange (RIE)
Electronic market place providers
Systematic Internalisers
Regulated markets
MTF
Quote driven
ABN AmroDeutsche BankLehman BrothersMerrill LynchCitigroupUBSCredit Suisse
Order driven
Multi-lateral trading facilities(facilitates trades – is neither a buyer or seller)
London Stock ExchangePlus MarketsSWX Europe (Virt-X)
Chi-XEurex derivativesICAPCantorNYSE Euronext – AlternativeNasdaq OMXNyfix Euro Millenium (dark pool – Euro equities)Turquoise (September 2008)
Quote driven
Order booksAnonymous crossing systems
Quote driven (internalises client orders and cross against trading book)
16
Chi-X “The first order driven Pan-European MTF”Chi-X “The first order driven Pan-European MTF”
Chi-XChi-X
FTSE 100FTSE 100
Dutch, German, Dutch, German, French French
.
Clearing – Fortis EMCF (European Multilateral Clearing Facility)
Owned by Instinet, which is owned by Nomura
Order driven central limit order book
Anonymous pre & post trade.Can deal anonymously off market as a ‘dark pool’
Order types:-Limit-Market-Iceberg-Fill or Kill (in full or not at all)-Execute & eliminate (execute to fullest extent possible)-Hidden
Agent Banks CSD’s
17
Turquoise – a new MTFTurquoise – a new MTF
300 pan European 300 pan European equitiesequities
1200 dark market 1200 dark market
.
Clearing EuroCCP (DTC)
Owned by leading investment banks who account for 45% of European trading.Owner banks provide liquidity through connections.
On & off order book trading.Onward order routing a possibility
Anonymous pre & post tradeDark pools allow hidden orders and delayed market release
Agent banks CCP’s
18
Some new competitors.. Some new competitors.. MTF’s BATS Trading – US – FTSE – Fortis Clearing Equiduct – 53% owned by Borse Berlin – Choice of clearing
systems. In testing Nasdaq OMX – 600 Pan European equities – Order routing
services provided by Citi for trades that cannot be fulfilled on Nasdaq OMX platform. 26 Sept.
NYSE Euronext Octopus – 400/500 Pan European blue chips. Central limit order book. November
Dark Pools (i.e. Not a public limit order book) -NYSE Euronext’s Smartpool -SWX’s Virt-x subsidiary links with Nyfix for Swiss blue chips -LSE Lehman Baikel (Europe’s deepest lake)
19
Systematic Internalisers Systematic Internalisers
L1 Art 27, L2 1287/2006/EC Art 21, FSA L3 Mar 6L1 Art 27, L2 1287/2006/EC Art 21, FSA L3 Mar 6
““A Systematic Internaliser must A Systematic Internaliser must publish a firm quote in those publish a firm quote in those
shares admitted to trading on a shares admitted to trading on a regulated market for which they regulated market for which they are systematic Internalisers and are systematic Internalisers and
for which there is a liquid for which there is a liquid market.”market.”
20
Order Routing Systems Order Routing SystemsOrder Routing Systems
Neonet - Independent agency brokerTrades with Regulated Markets, MTF’s, and 3rd party venues
Merrill Lynch POSIT
Morgan Stanley Passport
Client
UBS Direct Strategy
Lehman ETS
Goldman Rediplus
To most liquid market
Directed orders
Order Types:BestDiscretionaryFill or KillGTCGT date/timeIceberg (publicly displays only a portion of total volume, although total can be executed)
LimitMarket (unpriced)
Non-directed orders/baskets/blocks
To client specified market
Exhaust - saturate
Algorithms split orders to liquidity pools
Sweep (focus)
Amsterdam, Chi-X, Eurex, LSE, Euronext, SWX Virt-X, NYSE, Australia, Japan, Hong Kong, etc
21
Existing operational structure Existing operational structure
BrokersBrokersSettlementSettlement
systemsystem
ClearingClearingsystemsystem
BrokerBrokerTradingTradingplatformplatform
CentralCentralSecuritySecurity
DepositoryDepository
Transactionreport
22
Shifting the settlement Shifting the settlement
TradingTradingSettlementSettlement
serviceservice
ClearingClearingsystemsystemBrokerBroker
CentralCentralSecuritySecurity
DepositoryDepositoryTradingTradingplatformplatform
TransactionTransactionreportsreports