Will MiFID II hit liquidity in equity markets?

A guru in the foreign exchange market has warned that the new MiFID II regulations, coming into force on January 3rd 2018, could cause a fragmentary effect in the equity market, creating less liquidity, duplicating the less appealing aspects of the FX market.

Alex Gergo, the man behind XTC Markets, and a former quantitative trader at Deutsche Bank said: “We think the SI regime (Systematic Internaliser) might move equities market structure closer to how FX market structure looks.”

He cited as an example, the ‘last look’ practice in which market makers do not have to trade at the prices advertised.

Systematic Internalisers are investment firms which can execute client’s orders outside a regulated market.

According to the Financial Conduct Authority, MiFID II retains the SI regime. “However, it introduces two key changes: the expansion of instruments within the scope of the regime; and specific pre-trade transparency requirements for the trading of bonds and derivatives.”

Mr Gergo was warning that equity trading, post MiFID II, will make greater use of SIs, with private investors, especially, driven in this direction.But thanks to the last ‘last look’ provision, he warned that market makers would have to broaden the range between bid and ask spreads, to avoid being caught out by sophisticated traders, driving up costs.

Alex Gergo has long been a critic of ‘last look’ provision and an advocate of speed bumps. Take this quote from Zar Amroli, now the managing director of Deutsche Asset Manager but who worked with Mr Gergo at XTC for a while. A year or so back, he told euro money, “What attracted me to this firm were a few key considerations. Firstly, Alex was one of the few voices from the hedge fund side arguing for speed bumps on EBS as I also was on the bank side.What that tells me is that this is a business not based on making money from speed and latency. Its technology is all about being smart, not about being fast.”