Transcript INTRODUCTION - CISI - Financial Services Professional Body

The MiFID and the Markets Unleashing the Trading Forces
September 2008
Mike Jones
What is The MiFID about?
Customer protection
Ending the concentration
rule to provide
competition to exchanges
The core Lisbon
objectives
Greater transparency
Across all trading activity
Unifying EU countries around regulation,
providing a single passport.
Driving down the cost of capital
.
2
Trading structure and trends
Buy side – Institutions and
retail asset managers
Sell side – Institutional
sales & trading
Regulation
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)
-Exchanges
-Multi-Lateral Trading Facilities
-Systematic Internalisers
-Centralised Counterparty Clearing
-Settlement through Centralised Security Depositary
Systems (CSD’s)
.
3
Receiving & Transmitting v Executing
Fund
Manager
Client
Receiving &
Transmitting –L2 Art 45
Broker
ExecutingL1 Art 21
Market
Best outcome
For clients
Best interest
Of clients
Client
4
Where does Best Execution apply? – Cobs 11
“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.”
It applies
inside or
outside the
European
Community
Best Execution
It applies to retail and
professional clients, but not
eligible counterparties
Best execution
exists when a
contractual or
agency
obligation exists
with a client
It applies to all instruments,
on and off market
.
5
Prioritisation of execution factors
Price
Size
Cost
Best Execution
likelihood of
settlement
Speed
Liquidity
.
6
Best Execution steps
Sort clients and instruments.
Step 1: Selection
Prioritise factors – price,
of factors
cost, speed, etc.
Select venues for
Step 2: Selection ‘Best Possible Result’
of execution venues on a consistent basis
All venues
Step 3: Linkage
To execution venues
‘Best Possible
Result’ venues
Step 5: Periodic
review
Step 4: Execution
Of order
Best conditions
7
Markets
Markets
Quote
driven
Multi-lateral trading facilities
(facilitates trades – is neither
a buyer or seller)
MTF
Regulated
markets
Order
driven
London Stock Exchange
Plus Markets
SWX Europe (Virt-X)
Systematic
Internalisers
Electronic
market
place
providers
Recognised
Investment
Exchange
(RIE)
Anonymous
crossing
systems
Order books
Quote
driven
Chi-X
Eurex derivatives
ICAP
Cantor
NYSE Euronext – Alternative
Nasdaq OMX
Nyfix Euro Millenium (dark pool – Euro equities)
Turquoise (September 2008)
Quote driven
(internalises
client orders
and cross
against trading
book)
ABN Amro
Deutsche Bank
Lehman Brothers
Merrill Lynch
Citigroup
UBS
Credit Suisse
8
London Stock Exchange – A Recognised Investment
Exchange
LSE Tradelect services
SETS (a Regulated
Market)
Previously
SETS/SETSMM
Equities
Order book and
integrated electronic
market making
FT All Share plus some
Fledgling and AIM UK50
SETSQX (RM –
previously SEAQ,
Seats Plus
Equities
SEAQ (MTF –
previously
SEAQ)
Equities & Fixed interest
Quote driven
Quote driven together
with periodic order book market making
auctions
FT all remaining main
market, FT Fledgling,
some AIM
Market Maker can enter 2 sided
quotes using electronically
executable quotes
MM can deal off exchange as SI.
Allows Limits, Iceberg, Market,
Executable quotes.
Trades novate to central clearing
Other
services
AIM – Exchange
Regulated
Market/MTF
Equities &
Fixed interest
Uses SETS,
SEAQQX, SEAQ
Securities outside
SETS and SETSQX,
AIM
-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
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LSE SETS – an Order Driven system
Here is an example of the order book in continuous trading mode:
Order A
Order B
Order C
Time
10:15
10:22
10:18
Buy (Bid)
Volume Price
4,800
870
1,500
870
8,700
869
Sell (Offer/Ask)
Price Volume Time
871 5,900
10:25
871 7,500
10:48
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.
LSE SEAQ – A Quote Driven system
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LSE SETSQX – A mixture of quote driven & order driven
Settles outside CCP on a bi-lateral basis in
Euroclear/Crest
Brokers telephone
orders
Market Makers provide
non-electronic executable
quotes and liquidity
RSP Electronic
quotes
Brokers’ electronic
RSP gateway
Yellow strip shows best
available bid & offer
Quote book
----------------------------------Order display which
periodically uncrosses
Brokers enter
orders – only
named or
anonymous limit
orders – no
market orders or
iceberg orders
Market Makers
enter orders to
order book
uncrossings
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
.
12
Plus Markets – a Recognised Investment Exchange, operating a
Regulated Market and a Multi-Lateral Trading Facility
MM will trade report (deals
between non-mm members
seller reports) through
normal venues for that
stock
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
Off exchange quotation
facilities for Systematic
Internalisers in liquid shares
FTSE100
FTSE250
Smaller companies
AIM
European
10% share of FTSE Smaller
Cap
40% share of FT Fledgling
50% AIM of UK retail market
1/3rd
7,500 securities
-Quote driven execution – telephone
trading
- Quote driven execution – electronic
trading through RSP automated ‘RFQ’
services
.
13
SWX Europe (Virt-X) – a Recognised Investment Exchange, based in
London, and regulated by FSA
Order driven central limit order
book
A wholly owned
subsidiary of the
Swiss Stock Exchange
Swiss blue chips
Leading European
blue chips
Clearing through
LCH, Clearnet, SIS
X-Clear
Settlement through
Euroclear, SIS
Sega, SIS X-Clear
Operates a Regulated Market
for Swiss securities, and is
an MTF for non-Swiss
securities
.
14
Markets
Markets
Quote
driven
Multi-lateral trading facilities
(facilitates trades – is neither
a buyer or seller)
MTF
Regulated
markets
Order
driven
London Stock Exchange
Plus Markets
SWX Europe (Virt-X)
Systematic
Internalisers
Electronic
market
place
providers
Recognised
Investment
Exchange
(RIE)
Anonymous
crossing
systems
Order books
Quote
driven
Chi-X
Eurex derivatives
ICAP
Cantor
NYSE Euronext – Alternative
Nasdaq OMX
Nyfix Euro Millenium (dark pool – Euro equities)
Turquoise (September 2008)
Quote driven
(internalises
client orders
and cross
against trading
book)
ABN Amro
Deutsche Bank
Lehman Brothers
Merrill Lynch
Citigroup
UBS
Credit Suisse
15
Chi-X “The first order driven Pan-European MTF”
Order types:
-Limit
-Market
-Iceberg
-Fill or Kill (in full or
not at all)
-Execute & eliminate
(execute to fullest
extent possible)
-Hidden
Order driven central limit order
book
Chi-X
FTSE 100
Anonymous pre & post trade.
Can deal anonymously off
market as a ‘dark pool’
Dutch, German,
French
Clearing – Fortis EMCF (European
Multilateral Clearing Facility)
Agent Banks
Owned by Instinet, which is owned by Nomura
CSD’s
.
16
Turquoise – a new MTF
On & off order book trading.
Onward order routing a
possibility
Dark pools allow
hidden orders and
delayed market release
300 pan European
equities
Anonymous pre & post trade
1200 dark market
Clearing EuroCCP
(DTC)
Agent banks
CCP’s
Owned by leading investment banks who account for 45% of European trading.
Owner banks provide liquidity through connections.
.
17
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)
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Systematic Internalisers
“A Systematic Internaliser must
publish a firm quote in those
shares admitted to trading on a
regulated market for which they
are systematic Internalisers and
for which there is a liquid
market.”
L1 Art 27, L2 1287/2006/EC Art 21, FSA L3 Mar 6
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Order Routing Systems
Order Routing Systems
Neonet - Independent
agency broker
Trades with Regulated
Markets, MTF’s, and 3rd
party venues
UBS Direct
Strategy
Directed
orders
Client
Non-directed
orders/baskets/blocks
Order Types:
Best
Discretionary
Fill or Kill
GTC
GT date/time
Iceberg (publicly displays only a portion of
Merrill
Lynch
POSIT
To client
specified
market
To most
liquid
market
Goldman
Rediplus
Lehman
ETS
Morgan
Stanley
Passport
Amsterdam, Chi-X, Eurex, LSE,
Euronext, SWX Virt-X, NYSE,
Australia, Japan, Hong Kong, etc
Algorithms split
orders to liquidity
pools
Sweep
(focus)
Exhaust saturate
total volume, although total can be
executed)
Limit
Market (unpriced)
20
Existing operational structure
Central
Security
Depository
Transaction
report
Brokers
Settlement
system
Broker
Clearing
system
Trading
platform
21
Shifting the settlement
Broker
Trading
platform
Clearing
system
Trading
Settlement
service
Central
Security
Depository
Transaction
reports
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The MiFID and the Markets Unleashing the Trading Forces
September 2008
Mike Jones