A contentious issue in a recent Financial Conduct Authority (FCA) consultation was the question of whether quotes from systematic internalisers (SIs) should be included in the equity consolidated tape. The debate is being mirrored in Europe, where exchanges are pushing back against SIs as they defend lit markets.
The FCA’s consultation questioned whether SI quotes should be used to determine the best bid offer (BBO) alongside venue quotes, or whether all quotes provided from SIs should be published and/or a BBO from public SI quotes as a separate figure to the trading venue-derived BBO.
The paper asked market participants whether there was a case to view, through the tape: all equity SI quotes, the BBO of SI quotes in each liquid instrument, and the subset of public SI quotes within the BBO of an instrument.
Hayley McDowell, head of European market structure at RBC Capital Markets, explained the concerns behind the debate.
“SIs are key liquidity providers and policymakers want to leverage the CT as a means to advertise liquidity,” she told Global Trading. “But ultimately, SIs are the regulatory construct under which banks and market makers bilaterally deploy capital to their clients. Rather than adding value, the risk is that including pre-trade SI data will distort pricing information on the tape and create confusion for users.”
“Post-trade data on SI trading will advertise that liquidity more effectively as it will provide more meaningful information to investors.”
At the Investment Association, buy-side members were divided. While some believe that including the quotes in pre-trade data could improve price formation, others argue that it could lead to duplications.
“We consider that SI quotes should be left out of the initial build of the tape, and their potential future inclusion should be subject to review,” the group stated. “That said, members agree that SI trade data should be included in post-trade CT data.”
Representing the sell side, UK Finance were opposed to the suggestion, stating that SI quotes “will [not] advance the goals or the usefulness of the CT” and will increase costs. The existing pre-trade transparency regime is better suited to multilateral than bilateral venues, it notes, with SI quotes not a “meaningful reflection” of their ability to provide liquidity – a sentiment echoed by AFME. Both organisations suggested that there is not enough demand for SI quotes to necessitate their inclusion in the tape.
READ MORE: Equity transparency: AFME says “don’t bloat tape”; EPTA says “flag it”
Akin to the Investment Association, UK Finance members agreed that post-trade SI data would be useful for price formation, and called for changes to the post-trade transparency regime as a result.
“[We] call on the FCA to endorse FIX Trading Community guidance that strengthens the quality of SI post-trade data.”
FIX itself has made a number of suggestions in response to the FCA’s proposals, including the removal of duplicative reporting across the EU and UK and the addition of trade execution methodology to off-venue trade reports. The group also stressed the need for simplified transaction reporting.
BlackRock supported their inclusion in principle, but added that the recalibration of the SI transparency regime must be completed first.
“We support revisiting SI quote inclusion in the future, once the tape is established and there is an agreed framework governing the definition of addressable quotes, minimum quality criteria, and consistent supervisory expectations,” the investment manager said.
In Europe, SIX Group was the only exchange group to support the inclusion of SIs in the tape, stating that this could improve bilateral transparency.
READ MORE: Exchanges back Euronext’s call to defend lit markets
