Market Commentary & Insights
Destinations of Choice Mapping the New Equity Trading Landscape Opening Up the Market
MiFID II is transforming the European equity For a buy-side firm, the trading options are trading landscape, resulting in unprecedented not limited to traditional multilateral venues choice for participants. To remain competitive, such as dark pools operating within central buy-side firms looking to optimise order limit order books (“CLOBs”). Indeed, bilateral performance and meet more stringent best protocols such as SIs and requests-for-quote execution requirements need to be aware (“RFQs”), as well as the increasing use of of the growing range of options now at their conditional trading via Indications of Interest disposal. (“IOIs”), are at the forefront of this new, more open marketplace. The choices start with selecting the optimal type of venue: should your order be routed to Broker dealers also have a choice to make, a Regulated Market (“RM”) or a multilateral as they cannot run an MTF and an SI within trading facility (“MTF”)—regulated the same legal entity. trading venues required to provide non- discriminatory access—or, directly to a AROUND THE BLOCK Systematic Internaliser (“SI”)? RMs and MTFs are able to cross buyers and sellers and may The diversification in trading choices responds benefit from pre-trade transparency waivers. to a clear (though not necessarily loud) SIs, on the other hand, must trade on risk investor need. Buy-side firms, especially the but benefit from being able to price improve larger ones, have an ongoing requirement to relative to their published quotes as well as efficiently and quietly manage trillions of euros keep their quotes private when they deal above in assets. As a result, much of their business is standard market size (SMS). conducted in Large in Scale (LIS)—or block— orders. This enables them to process what may be the equivalent of many days’ worth of trading volume in a particular security.
VISUALISING ORDER MANAGEMENT CONTROL UNDER MIFID II
The buy-side now has more accountability for best execution, but a significant portion of venue routing decisions still rests with brokers. But for Large Blocks CONDITIONAL order types and interactions under the MiFID II OTC regime—conditional orders, including RFQs—the buy-side will have more direct control. LIS Venues Bilateral RFQ
RFQ ORDER BOOK Dark CLOB
Systematic Internalisers >SMS ORDER SIZE
Auctions SI
Multilateral RFQ
Systematic Internalisers Small Blocks COUNTERPARTY Bilateral Multilateral 2 DESTINATIONS OF CHOICE Fragmentation = Competition = Choice = Complexity Those familiar with the evolution of CLEARING THE WAY algorithmic trading over the last decade We should not forget that while execution is know well that the trend had previously been important, the total cost of trading extends a reduction in order size, since that is how across the investment lifecycle, including execution algorithms achieved their liquidity clearing and settlement. Under MiFID II, all capture and price efficiency. Under the trading venues (RMs and MTFs) are required emerging landscape, blocks again represent to open up to any central counterparty a compelling portion of the marketplace, (“CCP”) that requests it. Central clearing has both because of the efficacy of getting orders a number of cost, credit, and efficiency benefits done in a single execution and because they that are making it increasingly attractive to are exempted from the dark pool volume many institutional investors. caps under MiFID II/MiFIR (which do not apply to orders above LIS, RFQ venues or SI Ultimately, the choice of how to trade will transactions). depend on the specific situation of the client. The good news is that there are now more While algo trading will remain popular as a choices than ever to address what has become method of working large orders in the wider a complex web of trading venues, buy-side market, some of the newer trading venues offer requirements, and sell-side provision and the advantages of conditional access, pre-trade facilitation. price and counterparty transparency, and tailored liquidity. This provides even greater potential for discreetly finding and executing a block—and thus reducing market impact. SELECT EUROPEAN EQUITY BLOCK TRADING VENUES & OPERATORS Periodic Conditional Dark CLOB Quote-driven IOIs RFQ Bilateral Auctions orders Instinet X X X X X Blockmatch ITG POSIT X X X Liquidnet X X CBOE1 X X X Turquoise2 X X X UBS MTF X Sigma-X X X LIS on LSE X order book Nasdaq Nordic X X Euronext Block X X X Equiduct X X 1. Includes CBOE LIS in partnership with BIDS. 2. Includes Turquoise Plato Block Discovery. DESTINATIONS OF CHOICE 3 Fragmentation = Competition = Choice = Complexity Over the past decade, a myriad of trading VENUE CHOICES venues have sprung up, increasing the range Execution choices are growing, but in the of options for investment firms. This is background a consistent push from European enabling participants to exercise greater governments is aiming to move the majority choice as they try to accurately and efficiently of trading onto venues, a trend that began manage their increasingly sophisticated in the aftermath of the 2008 financial crisis. trading workflow. But it’s not making As a result, the share trading obligation trading any easier, particularly as the cost means that all trading in MiFID governed of regulatory compliance and continuous shares must take place on regulated markets, technology investment stacks up against MTFs, SIs or equivalent third-country an increasingly competitive environment. trading venues. All participants need new sets of tools The RM or MTF has the advantage of non- and fresh ways of thinking to thrive in an discretionary (a.k.a. “deterministic”) trading, expanding, automated, high-speed trading and is subject to Open and Fair Access rules, ecosystem. Indeed, executing with the stealth, opening up the liquidity of many participants. speed, and efficiency needed to minimise However, for some firms, especially larger information leakage and market disruption ones, it may be advantageous to use a broker has become mission-critical. As a result, dealer’s SI, as this provides access to discreet, investment firms need to be able to “virtually” bilateral trading against the SI’s principal manage multiple conditional venues, IOIs, SIs, book. But the choices don’t stop there. and RFQ opportunities in one integrated real- time trader cockpit. VENUE CHOICES UNDER MIFID II Venue Type Organisation Securities Listing Operation Designed for the IPO and initial Rigorous process for adding Non-discretionary trading sys- listing of securities. Also per- new securities; must ensure tem with open and fair access form secondary market trading that there is sufficient liquidity needing to be applied to mem- Regulated Market and currently the market of with market making agree- bership, market data, trading reference for many calculations, ments. fees and co-location. e.g. closing price. Secondary market trading only Must ensure that there is Non-discretionary trading sys- unless registered as an SME. sufficient information about a tem with open and fair access Multilateral Trading Facility Growth market for small/micro- security to admit it to trading; needing to be applied to mem- cap stocks. available to the public. bership, market data, trading fees and co-location. Secondary market trading only Must ensure that there is Non-discretionary access rules Organised Trading of non-equity securities. sufficient information about but operator has discretion Facility a security to admit it to trading. over matching. Over-the-counter principal All MiFID securities can be SI can choose their counterpar- trading of client orders operat- quoted but SI has to register in ties with some restrictions. Systematic Internaliser ed by a MiFID firm with some each security with its regulator. pre-trade transparency.* Not a trading venue. Trades All. Very limited for shares and must be reported to an APA. listed derivatives under MiFIR Over-the-Counter trading obligations. *Pre-trade transparency is limited to when an SI wishes to deal below Standard Market Size (SMS) with quotes and trades being made public via an APA. 4 DESTINATIONS OF CHOICE Fragmentation = Competition = Choice = Complexity While the SI enables bilateral, negotiated TO SEE OR NOT TO SEE: trading, MTFs play a valuable role as market PRE-TRADE PRICE TRANSPARENCY WAIVERS venues, enabling buy-side firms to choose Pre-trade transparency rules require SIs, RMs between traditional central limit order book and MTFs to publish (“display”) in real-time (“CLOB”) trading, periodic auctions, RFQ, current orders and quotes relating to shares. and quote-driven models. It is important to But there are a number of waivers that allow note that like SIs, both the RFQ and quote- participants to negotiate and execute trades driven venue models are bilateral trading in a way that limits pre-trade exposure, and protocols that allow trades to be negotiated as a result, the risks of market impact. between counterparties. In addition to the emergence of RFQs, conditional functionality is playing an increasingly important role in the market (see “Your Trading Choices”). PRE-TRADE WAIVER TYPES Negotiated Trade Waiver LIS Order Waiver Trade negotiated bilaterally away from a trading venue and brought onto the venue for confirmation Orders (including quotes and actionable IOIs) above using a negotiated trade system. LIS do not need to be made pre-trade transparent. Can apply to price reference waiver and negotiated • Price forming trade systems as well as orders and quotes in • Liquid shares–must occur within the order CLOB, quote-driven and RFQ systems. book or quotes of the venue (subject to the double volume cap) Price Reference Waiver • Illiquid share–must occur within a reasonable price of the last trade on the venue Applies to a price reference waiver system. All trading must take place at the midpoint of the • Not subject to the current market price primary market or the most relevant market for • VWAP/TWAP–trade is executed at a the security in liquidity terms. Can also trade at benchmark price over multiple time horizons the open and close price outside market hours. • Portfolio trades–trade is executed Subject to the double volume cap. simultaneously with five or more constituent shares Order Management Waiver • Non-price forming Applies to orders held by a trading venue in • Trade is executed for another reason such as a pending state ready to be released on the to facilitate a clearing and settlement process same terms as any other order entered into the system—for example, the hidden portion of an iceberg order. Double Volume Cap Suspends the price reference waiver and negotiated trade waiver for price-forming trades in liquid shares for six months for securities where more than 8% of pan-EU trading occurs under these waivers or where more than 4% occurs on a single venue. DESTINATIONS OF CHOICE 5 Your Trading Choices As we’ve noted, the range of trading venues available to buy-side clients has opened up considerably in the past year, along with a marked growth in blocks in proportion to overall dark trading. While the venues differ in their approach, many are addressing a growing demand from buy-side institutions for more efficient ways to trade. MATCHING MODELS AND ORDER TYPES: PROS AND CONS CENTRAL LIMIT ORDER BOOK (CLOB) PROS Works well for high-volume CONS Immediate market data trading activity and for smaller order dissemination means market price may The “granddaddy” of equity trading protocols. sizes in liquid stocks. Can benefit from move instantly as the market adjusts to Provides open and fair access to all participants a price reference waiver for pre-trade small additions and subtractions from using a CLOB protocol. Most operate on a price- transparency creating a continuously either side of the order book. Queuing time priority, but some dark pools use price-size traded dark pool. at each price level means there is as an alternative matching logic. Used by traditional an incentive to create new venues exchanges but market share has fallen under providing additional parallel queues 50% following the opening up of venue types leading to liquidity fragmentation. under MiFID I. PERIODIC AUCTIONS PROS Can provide larger executions CONS Not truly a dark interaction with low market impact for large so trade sizes above those on the lit Alternative to continuous matching and has been orders traditionally placed in dark order books may be hard to achieve. used at either end of the trading day by RMs for books. Often able to sit passively As price forming venues it may be many years to establish the opening and closing without being disclosed until auction difficult to ensure execution at the print. New order books holding very short periodic is triggered as well as liquidity- midpoint of the current spread, or dynamic auctions with prices within the seeking orders. Indicative price/size and as new concepts there has European Best Bid and Offer (“EBBO”). Priority of each auction is published but not been substantial innovation around when allocating orders can vary between venues. imbalance, so it is considered pre-trade price forming and price protection transparent and the dark pool double mechanisms, making prices and volume caps do not apply. excepted volumes harder to predict. REQUEST FOR QUOTE (RFQ) PROS No opportunity for broker CONS More complicated to implement dealer “last look”. Reduces market than CLOB. No guarantee of identifying A sister version of the OTC trading protocol. impact by restricting pre-trade liquidity. Enables buy-side firms to send discreet orders information disclosure. Full two- to limited numbers of potential counterparties in way transparency of potential order to solicit the best price. counterparties and ability to put firms in competition to bid for orders. IOIs PROS Helps to broaden the CONS Poor historical reputation due liquidity pool. to abuse by sell-side firms. A non-binding indication of interest. Lost much of its lustre through systematic abuse and “fishing expeditions” by sell-side. Commonly used in the US by dark pool operators to stimulate interest and broaden the liquidity pool. 6 DESTINATIONS OF CHOICE Your Trading Choices ACTIONABLE IOIs (AIOIs) PROS Growing in popularity with CONS Have some associated buy-side firms and is part of RFQ perceptions linked to IOIs and the Offer significant promise for buy-side traders. venue and trading workflows. way they were used in the past. Some SIs and Instinet’s request for quote venue support both IOIs and AIOIs in addition to firm quotes. CONDITIONAL INTEREST PROS Can be used with current dark CONS Potential to further fragment LIS MTFs, and is intrinsic to RFQ the market or give the appearance Rising in popularity. Conditional functionality enables functionality. of “phantom liquidity”. order interest to be provisionally noted on multiple venues, but as soon as a firm opportunity is sourced on one venue, the order’s conditional interest must be removed from the other venues. QUOTE DRIVEN MARKETS PROS Quote driven markets must CONS Market makers act as principal, require execution at or better than the trading on risk and have discretion Bilateral privately negotiated trades which can quote of the market marker. Provides about who they choose to trade with occur both on or off venue against a market maker. liquidity in more esoteric securities. and which orders they wish to take. OFF-VENUE CROSSING PROS Negotiated trades have no CONS Sub-LIS trades in liquid shares (NEGOTIATED TRADES) requirement to make the trade subject to the dark volume cap and all pre-trade transparent. trades must be negotiated in a truly Bilateral privately negotiated blocks off venue. bilateral fashion without running Conducted in an EU regulated market security a separate trading venue. that is not subject to pre-trade transparency and on terms that are no worse than those that could be achieved on the relevant exchange order or quote book. Can reduce market impact by restricting pre- trade information leakage. DESTINATIONS OF CHOICE 7 Your Trading Choices TRADING WORKFLOW OPTIONS: PRODUCT MATRIX URGENCY Lower Higher Higher BLOCK AGGREGATION CORE WORKING LIQUIDITY STRATEGIES SEEKING KEY Higher Lit Periodic Auction Dark RPW Leakage SI Block/Flow Information RFQ Venues TRADE SIZE Dark LIS Lower AGGREGATION OPTIONAL BLOCK BLOCK BLOCK BLOCK AGGREGATION OPTIONAL CONDITIONAL ONLY ORDERS Lower Blotter Dark Liquidity Benchmark Participation Lit & Dark SOR Scraping Aggregator Seeking Algos Strategies Strategies Liquidity Seeking Smart Order Algos • Passive • VWAP • Implementation Strategies Router submits • Custom • Normal • TWAP Shortfall Algos • Passive tactical order types directly to client logic • Aggressive • Normal destinations. • Aggressive REG NMS: THE US APPROACH originally intended, and sits uneasily with effectively relieves exchanges of the need some constituents. to check protected quotations at other In the dozen or so years since the trading centers by placing the onus on introduction of Regulation National Market Regulators (and exchanges) have proposed the broker dealer. ISOs are limit orders System (“Reg NMS”) in the US, debate different programmes to address the that are routed to execute against the full has raged over the benefits of that new increase in off-exchange trading. The displayed size of all protected quotations market structure. The "order protection US Securities Exchange Commission is with prices that are better than the price rule" or "trade-through rule" provides midway through conducting a two-year of the ISOs, allowing a broker dealer to inter-market price protection of orders Tick Size Pilot Program that subjects execute a trade immediately and ensuring by restricting the execution of trades on groups of securities to prescribed that investors receive an execution price one venue at prices that are inferior to minimum price increments (widening the equivalent to what is being quoted on any displayed quotations on another venue. tick size on certain smaller stocks), as well other exchanges. For example, if an order Introduced with the original goals of as the Trade-At rule, which prevents price router wishes to immediately access a normalising price discovery and formation matching by a trading venue not quoting large-sized quotation with a price inferior across Exchange and Off-Exchange at the protected bid or offer (inhibiting to protected quotations at other trading venues and protecting the retail investor, smaller increments of price improvement venues, it can route an ISO to execute since Reg NMS was created there’s little in off-exchange venues). against the large-sized quotation, while doubt that spreads have narrowed, pricing There are exemptions to Reg NMS simultaneously routing additional ISOs has sharpened and fees have fallen; but dealing with situations where exchanges to execute against all of the better-priced the proliferation of trading venues, growth are having technical difficulties or the protected quotations.* in the role of dark pools, and significant market is moving very fast. The most percentage of liquidity generated by high- important exemption in terms of use is the *Excerpted from: https://www.sec.gov/spotlight/ frequency trading firms has not provided emsac/memo-rule-611-regulation-nms.pdf intermarket sweep order (“ISO”) which for the transparency that Reg NMS 8 DESTINATIONS OF CHOICE How the Market Currently Trades The choice of execution venue depends on individual client requirements. This explains the widely-distributed breakdown of trading styles in Europe, with around 43% of volume being traded via lit markets, over 40% via OTC, and the remaining orders being completed via SI, auctions, and dark pools. HOW EUROPE’S EQUITY MARKET IS TRADED BREAKDOWN BY TYPE OF TRADE (%) 4.64% Systematic Internalisers 7.42% 40.73% Auctions Over-the-counter 4.64% Dark 42.58% Lit Source: Fidessa, February 2018 TALES OF THE TAPE To combat this, MiFID II also introduced data disaggregation and free delayed But there is perhaps no area more market data, and has mandated ESMA to controversial in the US equity market than produce a European consolidated tape for the subject of market data fees, which equities if one does not surface within a have been inexorably rising for years, few years. In the meantime, plans continue and are one of the major reasons why for competing, national versions. the revenues of US exchanges continue to rise. In the US, the major exchanges contribute to—and earn revenue from—a Consolidated Tape, the Security Information Processor (“SIP”). They also sell, at a premium, separate slightly “faster” and richer data feeds to more demanding or sophisticated users. While MiFID II forces exchanges to sell their data on a “reasonable commercial basis”, there are widespread concerns about the cost of market data, which has risen sharply in recent years at the majority of European exchanges. DESTINATIONS OF CHOICE 9 Wouldn’t You, If You Could? In the past year, there has been a marked Once a potential match has been found, increase in the use of conditional interest in it can be followed-up with an order/RFQ as Europe. While not strictly new to the market, appropriate to the system. There is little doubt its widespread deployment indicates the that the conditional interest functionality can growing value it can provide in the current enhance significant buy-side block liquidity landscape. At its simplest, conditional interest and is now available on a number of MTFs, is simply an IOI or an order that is dependent providing one more option for participants on other criteria being met. In the case of block looking to execute a block trade. trades, it can be used to advertise a trade on multiple venues simultaneously or enable buy-side firms to interact with sell-side conditional interest. NET VS GROSS: CCPs have significant and growing advantages THE TRUE COSTS OF BEST EXECUTION for participants, including reduced margin cost, flexible netting and settlement options, and robust Best execution should take into account more than default management procedures. In addition, just the fill price, and should include the cost of there is considerable momentum behind the shift clearing and settlement. The decision of whether from bilateral settlement to central clearing, as to use a central counterparty (“CCP”) to clear regulators look to reduce systemic risk. Not all trades is an important one, as it has implications CCPs are interoperable, however, and those that do on cost, efficiency, and security. For participants, not provide “open access”, risk participants clearing there are four main choices: in a vertical monopoly. 1. Bilateral settlement MiFID II brings in the requirement for all trading 2. Single member clearing venues (RMs and MTFs) to provide open access and 3. Single CCP e.g. Xetra, Borsa Italiana, open up trade feeds to any CCP that asks for one, BME and Equiduct ensuring non-discriminatory access to trading and clearing infrastructures. In short, trading venues 4. Multi-CCP should have non-discriminatory access to CCPs— a. Open Access via preferred CCP allowing investors to trade on alternative platforms e.g. Euronext and benefit from lower trading fees across asset b. Interoperable CCP e.g. CBOE, classes. Interoperability means allowing products LSE, Turquoise, OMX and traded on separate venues to be fully fungible. BlockMatch In other words, it allows CCPs to interconnect. 10 DESTINATIONS OF CHOICE Wouldn’t You, If You Could? RFQ ARRIVES ON SCENE for quotes and AIOIs that allow large orders to be shown privately without giving up While interest in conditional trading has market-moving information to the public. been on the rise, the emergence of the RFQ BlockMatch also has delayed reporting built as a potent tool in the buy-side armoury is in when one side of the trade is acting as definitely an innovation that the equity and principal—just like an SI. Instinet created in particular share trading market needs. this as an option for member firms that The dominant trading protocol across could benefit from central clearing through the major ETF, bond, foreign exchange, a trading venue rather than trading derivatives, credit, and rates markets for bilaterally OTC. decades, RFQ provides tailored liquidity and significantly reduces market impact. The model is similar to an off-venue RFQ is a private auction, with the buy-side negotiated trade and by its nature is private. firm soliciting firm quotes from one or more It involves limited give-up of information named counterparties. The buy-side firm and enables the buy-side firm to choose provides the symbol, size, and side, and the which counterparties they deal with. This sell-side recipients respond with firm quotes. can prevent orders being broken up by other While the quotes are firm from the sell-side, orders, and reinforces the value of broker the buy-side trader is not obliged to trade at dealer relationships but is not restricted to the levels they receive. buy-side to sell-side interaction, with new “all to all” models becoming more prevalent, The RFQ has its limitations, specifically in the including within BlockMatch. Inherently easy identification of large blocks of natural conditional in nature, RFQ venues can liquidity, but it has a range of benefits and be enhanced by way of AIOIs, providing recent innovations that will enable long-term participants with pre-trade transparency viability. For example, our own BlockMatch and an on-venue alternative to accessing RFQ combines RFQ with undisplayed IOIs a bilateral counterparty. for conditional trading and has LIS waivers THE CASE FOR AN RFQ VENUE Investment firms have limited alternatives to be able to continue crossing equity client business: they can set up an MTF themselves or externalise their crossing to another trading venue, such as auction on demand, quote driven market or effect a negotiated trade above LIS. RFQ MTF SI Quote Driven Auction MTF Pre-trade transparent —Visible quotes Tailored liquidity/ Bilateral trading Commission Transparency of counterparty Resting orders Trade vs. multiple counterparties No opportunity to “Last look” Conditional trading via IOIs DESTINATIONS OF CHOICE 11 Wouldn’t You, If You Could? CONDITIONAL RFQ WORKFLOW Blotter scraping IOI or AIOI IOI dissemination IOI matched with or manual submission (AIOI is made public) (optional) contra side IOI IOI match alert RFQ (firm auto accept, Quote response Publication to submit RFQ or conditional) (can be automated) of quotes Quote acceptance Execution (automated if RFQ is firm) 12 DESTINATIONS OF CHOICE Summary Buy-side firms are becoming the proverbial At the end of the day, trading venues and “victims of choice”, with more alternatives as liquidity sources are of the most value when well as increasing obligations related to their they are carefully chosen and engaged based access to market liquidity. While the sharp on each order’s particular characteristics, rise in destinations and liquidity sources fuels market conditions, and the trader’s objectives. concerns about further market fragmentation, It’s important to not think in categorical conditional trading, in particular, means terms, such as “should I interact with venue that there are now more and better ways to X?”, but rather to develop a continually- execute blocks than ever before. However, evolving strategy for “when and how to orders still need to be discreetly worked optimally interact with venue X”. based on their goals—with the appropriate As we mentioned in our previous publication, sensitivity to factors such as liquidity capture “Trading in the Age of Data”, utilising post- or information risk management. trade information on a real-time basis is a As a result, there is an increasing role for critical component to the process of best alternative trading models that assist clients in execution. Buy-side clients should be applying seeking block-sized executions and enhancing this data to the process of venue selection execution quality—such as RFQ. While the as well as order management styles and benefits of conditional interest are now pretty processes, and must be aware of the pros and familiar to most participants, the RFQ has cons of all of these destinations, so they can not been widely used in the European equity manage their access, and their execution markets outside of ETFs, until now. Given its quality, accordingly. primary role in trade execution across the fixed income, credit, and OTC derivatives markets, we think it is set to play a major role in expanding choices and offering new opportunities in the electronic trading of equities, on venue, for all participants for many years to come. DESTINATIONS OF CHOICE 13 Glossary of Terms Actionable Indication of Interest Central Limit Order Book (CLOB) Exchange-Traded Fund (ETF) (AIOI) A centralised, transparent system A security that closely tracks an index, A firm quote from one member or used to aggregate all limit orders on a commodity or a basket of assets, participant to another in response platform and facilitate trading between but trades like shares of stock on an to a request for quote that contains counterparties. exchange. all necessary information to agree on a trade (see also Indication of Conditional Interest Financial Conduct Authority (FCA) Interest). An indication of interest to execute The conduct regulator for financial an order contingent upon certain services firms and financial markets in Agency Broker stipulations that must be met before the UK and the prudential regulator for A broker who acts as an agent for a client the order can be fulfilled (see also over 18,000 of those firms. and trades on their behalf. Indication of Interest). High-Frequency Trader (HFT) Auction Crossing Network A trading firm that uses computing Buyers and sellers submit orders that A network that provides an alternative power and algorithms to execute are crossed at a point in time at the trading system (ATS) for buyers and large quantities of orders at exchanges price which maximises the total size of sellers to match for execution without triggered by information or data cues. the match. going through an exchange. Impact Authorised Publication Dark Unintended shifts in market pricing and Arrangement (APA) Trading protocol with complete behavior based on the trading activity. A person authorised under the counterparty anonymity and lack of provisions established in the MiFID transparency into liquidity or orders Indication of Interest (IOI) II directive to provide the service unless matches are made. Showing a buyer’s non-binding interest of publishing trade reports on behalf in buying a security that is addressed to of investment firms. Dark Pool the seller. A venue for trading securities in which Bilateral investors can makes trades that are not Information Leakage An agreement negotiated between visible to anyone until executed. Unintended dissemination of a firm’s two parties (see also Negotiated Trade proprietary pricing and trading or Over-the-Counter). ESMA (European Securities and information that could allow competing Markets Authority) traders to adjust behaviours to the Block An independent EU Authority that detriment of the firm. Large-sized securities transaction contributes to safeguarding the stability to be bought or sold by institutional of the European Union’s financial system Intermarket Sweep Order (“ISO”) investors for scale and price benefits by enhancing the protection of investors A type of limit order submitted to a US (see also Large-in-Scale). and promoting stable and orderly exchange for automatic execution in a financial markets. particular market center even when a Cash Equities different exchange is posting a Stocks, equities, or equity securities Exchange better price. traded by institutional investors or A regulated market where brokers large financial institutions on major and traders buy and sell securities, Large-in-Scale (LIS) exchanges. commodities, derivatives, currencies, An order that is equal to or larger than and other financial instruments the minimum size of order specified Central Counterparty (CCP) (see also Regulated Market). in Table 2 in Annex II of the MiFID Sits between the participants in Implementing Regulation (RTS1) a trade. Manages and mutualises (see also Block). counterparty, operational, settlement, market, legal and default risks for market participants. 14 DESTINATIONS OF CHOICE Liquidity Provider Small Medium Enterprise (SME) A firm which posts bids and offers on a Negotiated Trade Firms in which employees and assets are trading venue generally using a market A transaction that is negotiated below a certain threshold. making strategy with the objective of bilaterally between buyer and seller capturing short term imbalances in the (see also Bilateral or Over-the-Counter). Standard Market Size (SMS) market (see also Market Maker). A MiFID order size threshold for Off-Exchange or Off-Venue systematic internalisers below which Lit Market Trading activity that is not processed quotes must be made public. The opposite of a dark pool, bids and through a central exchange or trading offers are made public (“displayed”) in venue. Systematic Internaliser (SI) real time. An investment firm, in which, on an Organised Trading Facility (OTF) organised, frequent systematic and Markets in Financial Instruments A multilateral system that allows the substantial basis, deals on own account Directive II (MiFID II) matching of non-equity securities at the when executing client orders outside a European Union (EU) legislation discretion of the operator. regulated market, an MTF or an OTF which regulates investment firms/ without operating a multilateral system. institutions that provide services related Over-the-Counter (OTC) to “financial instruments”. A contract between two parties that Trading Venue does not involve a central exchange Includes MTFs and RMs, where Markets in Financial Instruments or counterparty (see also Bilateral or securities are exchanged. Regulation (MIFIR) Negotiated Trade). European Union (EU) law that is a sister regulation to MiFID II. Periodic Auction A system where securities are sold at Market Maker specific times to aggregate liquidity and A firm that buys and sells securities as facilitate competitive bidding. principal in order to provide liquidity to a trading venue or the market in Regulated Market (RM) general (see also Liquidity Provider). MiFID term for a primary exchange (see also Exchange). Midpoint Order An order type designed to facilitate Request for Quote (RFQ) trade execution at the midpoint of the A trading protocol in which a participant bid-offer spread. invites one or more other participants to offer a quote for securities or trading Multilateral Trading Facility (MTF) instruments. A European regulatory term for a trading venue that facilities crossing Share Trading Obligation through electronic platforms, as Requirement under MiFID II for an alternative to traditional stock investment firms to ensure that exchanges. the trades they undertake in shares admitted to trading on a regulated National Best Bid and Offer market, or traded on a trading venue, (NBBO) take place on a regulated market, A SEC regulation that requires brokers MTF, systematic internaliser, or an to execute customer trades at the equivalent third-country trading venue. best available ask price when buying securities, and the best available bid price when selling securities. DESTINATIONS OF CHOICE 15 Benjamin Stephens [email protected] +44 207 154 8743 Salvador Rodriguez [email protected] +44 207 154 7252 © 2018, Instinet Incorporated and its subsidiaries. All rights reserved. INSTINET is a registered trademark in the United States and other countries throughout the world. This material is provided for informational purposes only and does not constitute an offer, solicitation, or recommendation with respect to the purchase or sale of any security, product or service. It does not take into account the particular investment objectives, financial situation or needs of individual clients. Approved for distribution in Europe by Instinet Europe Limited, which is authorised and regulated by the Financial Conduct Authority.