There was an interesting article in the FT yesterday about how IG Index (the spread betting company) will now be connecting to Chi-X and, I assume, other MTFs too. The story reminded me of how MiFID is starting to permeate outside the immediate professional trading community and enter the consciousness of the public at large. My own experiences in this area have been mixed – I bought a bunch of shares the other day and, on the spur of the moment, decided to ask my broker what his best execution policy was and which venues they had considered before executing my order. I was surprised and disappointed with the response. My broker had only the sketchiest knowledge of what best execution really meant and an even hazier grasp of the different venues that have sprung up since MiFID was introduced 2 years ago. Most alarming of all, they seemed almost resentful that someone had dared ask “the MiFID question”.
Besides making a mental note to find another broker, this experience set me thinking about how far MiFID has (or has not) affected the retail trading community across Europe. It depends where you look – Holland and, in particular, Amsterdam seems to have always enjoyed a thriving almost semi professional retail sector. Italy is similar, but the rest of Europe doesn’t have anything like as active a retail audience. This divergence explains why several months ago one of Europe’s largest liquidity providers – Optiver – set up a joint venture with Holland’s Binck Bank called The Order Machine or TOM for short. TOM dispenses with the need for an exchange altogether as it allows retail order flow to interact directly with Optiver’s market making capabilities to the benefit of both the retail trader and Optiver themselves. It will be interesting to see if this is just a Dutch phenomenon or a pointer to the future of equity trading across Europe. If it is the latter, then we may see this model replicated as other Liquidity Providers build or buy MTFs so as to interact with order flow in a similar fashion.
Another dimension to this issue is the level of understanding amongst corporate brokers and main board directors of exactly how (and where) the stock of the firms they represent is trading.
In the simple pre-MiFID days you need only to look at the trade feeds from the LSE or other primary exchanges to get a good idea of the on and off exchange activity in your stock. It’s pretty different now. Take Imperial Tobacco for example – 18 months ago the trading of this stock was split mainly between the LSE and Chi-X. Last week it traded on over 12 separate lit and dark venues and each of these achieved a different VWAP. Also interesting is the average trade size which, aside from Liquid Net, was broadly comparable between the lit and dark arenas. This is of more than just academic interest as this breakdown will influence which executing broker you use and, ultimately, what kind of price you should expect to pay or receive. (You can see this for yourselves if you log in and use the new forwards/backwards buttons on the Fragulator)
Anyway, next time you buy or sell shares, don’t forget to ask your broker the MiFID question.