VFF

September 2017

Execution in post MiFID II environment

Espen Andersen

Head of Electronic Execution Services

espen.andersen@dnb.no

Market structure and Execution under MiFID I

• Expansion in number of trading «venues»:

• MTF – Multilateral Trading Facility

• BCN – Broker Crossing Network

• Internal markets

• Increase in «dark» execution:

• Regulated Markets (RM)

• MTF – Multilateral Trading Facility

• BCN – Broker Crossing Network

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DNB dark

volumeTrade category break down

OBX -FY 2015

Source: Fidessa Fragmentation Index

Venue market share

OBX - FY 2015

Source: Fidessa Fragmentation Index

Market structure and trading under MiFID I

• Liquidity no longer available at the exchange. How to consolidate the market?

• Smart Order Router (SOR)

• Execution algorithms

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Client S

O

R

Algo

DMA

Sell side

Care

Internal

market

Introduction to Execution under MiFID II

• The intention of new regulation is to bringing as much trading as possible on to

regulated markets to participate in the price formation process.

• New best-ex regulation mandating more documentation, more reporting and the need

for continuous monitoring for both buy- and sell-side

• Massive increase in data points for both trade porting and transaction reporting with

new reporting obligations for the buy-side.

• Market structure and execution possibilities to change with the introduction of new

venue types (SI), capping of dark pools (BCN) and new order types.

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Trading obligation

• “Investment firms will be required to trade shares that are admitted to trading on a

RM or traded on a trading venue on a RM, MTF or SI”

• Double volume caps

• 4% and 8% volume caps on RPW and NTW (liquid instruments) means trading in BCNs will come to a

halt

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Best Ex requirements

• From all «reasonable steps» to «all sufficient steps»

• Participants need to measure execution quality and

document «all sufficient steps» on a continues bases

• Execution policy must be a «living document»

• Even though all clients are not «caught» in MiFID II

Investment firm definition => «sell sides» are.

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DNB

Transaction Cost Analysis

DNB Order Performance Monitor

Conditional orders

• Indicative orders can be represented in

multiple systems at once, sending a firm

order into a specific system only when a

counterparty is found.

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Conditional orders

• Turquoise Plato Block

Discovery

• Bats LIS

• POSIT Conditional Orders

Large In Scale (LIS) waiver post MiFID II

Periodic auctions

• Order books holding very short regular

auctions with prices within the EBBO.

• Indicative price/size of each auction is

published, so it is considered pre-trade

transparent and the caps do not apply.

• Some also offering broker preference

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Periodic auctions

• Bats Europe Periodic

Auctions

• Nasdaq Auction on

Demand

• Sigma X Auction Book

Order book LIS

• Block orders above LIS

executed with different

order entry

mechanisms.

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Order book LIS

• UBS MTF Large in scale trades

• Most of the mechanics of the MTF remain unchanged, but trades that meet the LIS

size requirements are consummated under the LIS waiver.

• Euronext Block MTF

• London-based dark MTF that will be revamped into a new block-trading MTF

• LIS on SETS order book

• Hidden orders within the LSE SETS lit order book, with peg option.

• Deutsche Borse volume discovery orders

• Iceberg order type to allow execution of large orders within the Xetra book

• Nasdaq Nordic LIS Block

• Hidden orders integrated within the Nasdaq Nordic lit order books

Systematic Internaliser (SI)

• Classified as a «Venue» under MiFID II

• Do not have to comply with Tick size regime

• Timing of trade publication (up to 1 min)

• Pre-trade transparency 10% of SMS public

• Can provide «private quotes»

to predetermined

client groups

• Must operate on risk

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Dark distribution

pre/post MiFID II?

Will Brokers be able to “re-aggregate”?

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The end of “Old school upstairs-crossing”?

• No, the regulators intention is not to stop

matching of block trades – but it might get a

bit more complicated

• Local knowhow and client familiarity still

matters

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