Those of us who remember the good old days will recall the industry debate as to how much dark liquidity was really in existence. In one corner were the exchanges who, through FESE, claimed that the amount of malevolent dark trading going on was unacceptably high. In response the brokers claimed through their trade body, AFME, that actually it was pretty low. And, as we all know, FESE won the day and successfully convinced ESMA of its cause and so, like it or not, we now have dark pool caps coming into force in a few months’ time. But, as the old saying goes “be careful what you wish for” as the sell-side is breathing life into the moribund SI construct in response.
In addition, it looks like electronic market makers like Virtu are also stepping up to the SI plate too. The logic is simple – if you are going to make prices at all then why do it on an exchange? Especially when you can wrap up your activities in a fully regulated and therefore hygienic construct like a Systematic Internaliser. Moreover, if you really can offer the best priced merchandise, then best execution obligations will compel liquidity seekers to look at your prices. So are we glimpsing the exchanges of the future – unilateral price distributors that disintermediate good old fashioned exchanges? Some, like my good friend Larry Tabb, believe that we might.
Truth be told though, and this was pointed out to me by a colleague in the office this morning, the whole process of simply buying or selling shares is getting monstrously complicated. And, all this complexity comes at a cost (both in hard cash and transparency) and this is to the detriment of the man on the street.
This complexity will, of course, smooth out as winners and losers emerge from the post MiFID II battleground, but I suspect one day we will look back at our industry and wonder how it ever got the way it is today…