The systematic internaliser (SI activity) is increasingly being driven by new electronic market making firms such as Optiver and XTX, according to Liquidnet’s latest EMEA liquidity landscape report.
Compiled by Gareth Exton, head of Liquidnet’s execution and quantitative services EMEA, in partnership with Rebecca Healey, Redlap Consulting, the report found these firms are offering liquidity to asset managers bilaterally, and often, in larger size than public lit markets but still significantly lower than large in scale (LIS).
It noted the need to trade more frequently in smaller clips, together with the rise in the number of liquidity providers adds to the complexity in sourcing liquidity in more sporadic intraday trading volumes.
The report also said as machine learning algos are more susceptible to manipulation and inadvertent spoofing, European regulators are taking a closer look.
They are focusing on the risk of wider systemic impact from procyclicality and negative feedback loops given the interconnectedness of markets.
With trading firms often more focused on performance rather than in depth knowledge of how broker algos work, it said future guidance on potential issues for compliance teams under regulatory technical standard 6 is likely.
RTS 6 requires firms to annually perform a self-assessment and validation process where firms engage in algorithmic trading activity
“In future, comprehension from broker to client regarding how order flow interacts in the marketplace will not only need to be understood by trading teams, but also by those in the back and middle office,” it added.
As for the method of execution, it said dark versus lit, primary versus MTF, European policy makers remain focused on how to create an equivalent USD $850 billion liquid market.
The report said, “In theory Europe benefits from time zone but two thirds of investors continue to invest in US stocks rather than European.
“European policy makers may currently be tied up with the energy crisis, moving the consolidated tape and the MiFID/R Refit further down the priority list, but the new focus on challenges in the derivatives and commodities market may inadvertently have ramifications on equity market structure evolution.” it added.