Mifid II: Market liquidity becomes an issue

May 31, 2019
Buy side believes equity liquidity has become harder since introduction of European regulation

The latest trend emanating from the introduction of Mifid II is that sourcing liquidity in Europe’s equity markets is a harder job for the buy side, according to a new report from Connecticut-based consultancy Greenwich Associates.

A review of the European equities market under the regulation introduced at the start of 2018 finds that 44 percent of buy-side traders believe equity liquidity has become harder to source since the implementation of Mifid II, while 16 percent believe it has actually become easier.

‘It is possible that much of the frustration stems from the inarguably painful transition, and Mifid’s new pre and post-trade transparency requirements have made the trading process more complicated,’ says report author Richard Johnson, principal in the market structure and technology practice at Greenwich Associates, in a statement.

‘But like it or not, there is no going back now. European equity traders will adjust to this new normal as new products are introduced and new service models evolve to help them [with] this transition.’

In addition, in a fascinating examination of how order flow has changed under Mifid II, the report shows a continuing increase in the popularity of periodic auctions and systematic internalisers as trading venues.

Around three quarters of buy-side firms indicate that they are using periodic auctions, with 40 percent saying they have a positive viewpoint of the venues. Meanwhile, dark-trading venues continue to prove popular with buy-side firms despite regulatory attempts to curtail this activity, primarily through the double-volume caps first introduced in March 2018.

Greenwich’s report reveals that 20 percent of order flow is being sent through dark trading via large-in-scale waivers, while 34 percent is sent through ‘lit’ multilateral trading facilities and exchanges, including periodic auctions.

‘New products have been built specifically to address the regulations such as periodic auctions and pools,’ says Johnson.

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