Execution in post MiFID II environment

Execution in post MiFID II environment VFF September 2017

Espen Andersen Head of Electronic Execution Services [email protected]

Market structure and Execution under MiFID I

Venue market share OBX - FY 2015

• Expansion in number of trading «venues»: • MTF – Multilateral Trading Facility • BCN – Broker Crossing Network

• Internal markets

• Increase in «dark» execution:

Source: Fidessa Fragmentation Index

DNB dark volume

Trade category break down OBX -FY 2015

• Regulated Markets (RM) • MTF – Multilateral Trading Facility • BCN – Broker Crossing Network Source: Fidessa Fragmentation Index

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Market structure and trading under MiFID I • Liquidity no longer available at the exchange. How to consolidate the market? • Smart Order Router (SOR) • Execution algorithms

Sell side Care

Client DMA

Internal market

S O R

Algo

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Introduction to Execution under MiFID II • The intention of new regulation is to bringing as much trading as possible on to regulated markets to participate in the price formation process.

• New best-ex regulation mandating more documentation, more reporting and the need for continuous monitoring for both buy- and sell-side

• Massive increase in data points for both trade porting and transaction reporting with new reporting obligations for the buy-side.

• Market structure and execution possibilities to change with the introduction of new venue types (SI), capping of dark pools (BCN) and new order types.

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Trading obligation • “Investment firms will be required to trade shares that are admitted to trading on a RM or traded on a trading venue on a RM, MTF or SI”

• Double volume caps • 4% and 8% volume caps on RPW and NTW (liquid instruments) means trading in BCNs will come to a halt

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Best Ex requirements

DNB Transaction Cost Analysis

• From all «reasonable steps» to «all sufficient steps» • Participants need to measure execution quality and

document «all sufficient steps» on a continues bases

• Execution policy must be a «living document»

DNB

Order Performance Monitor

• Even though all clients are not «caught» in MiFID II Investment firm definition => «sell sides» are.

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Conditional orders • Indicative orders can be represented in

multiple systems at once, sending a firm order into a specific system only when a counterparty is found.

Conditional orders

• Turquoise Plato Block Discovery

• Bats LIS • POSIT Conditional Orders

Large In Scale (LIS) waiver post MiFID II

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Periodic auctions • Order books holding very short regular auctions with prices within the EBBO.

• Indicative price/size of each auction is

published, so it is considered pre-trade transparent and the caps do not apply.

• Some also offering broker preference

Periodic auctions

• Bats Europe Periodic Auctions

• Nasdaq Auction on Demand

• Sigma X Auction Book

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Order book LIS • Block orders above LIS

executed with different order entry mechanisms.

Order book LIS • UBS MTF Large in scale trades • Most of the mechanics of the MTF remain unchanged, but trades that meet the LIS size requirements are consummated under the LIS waiver.

• Euronext Block MTF • London-based dark MTF that will be revamped into a new block-trading MTF

• LIS on SETS order book • Hidden orders within the LSE SETS lit order book, with peg option.

• Deutsche Borse volume discovery orders • Iceberg order type to allow execution of large orders within the Xetra book

• Nasdaq Nordic LIS Block • Hidden orders integrated within the Nasdaq Nordic lit order books 9

Systematic Internaliser (SI) • Classified as a «Venue» under MiFID II Dark distribution pre/post MiFID II?

• Do not have to comply with Tick size regime

• Timing of trade publication (up to 1 min) • Pre-trade transparency 10% of SMS public • Can provide «private quotes» to predetermined client groups

• Must operate on risk 10

Will Brokers be able to “re-aggregate”?

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The end of “Old school upstairs-crossing”?

• No, the regulators intention is not to stop

matching of block trades – but it might get a bit more complicated

• Local knowhow and client familiarity still matters

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CONFIDENTIAL

Disclaimer This presentation is strictly confidential and prepared exclusively for the benefit and internal use of our client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) and not for distribution or publication. The information may not be reproduced without the consent of DNB Markets. The information in this presentation is based upon any management forecasts supplied to us by the Company and publicly available information. We have relied upon and assumed, without independent verification, the accuracy and completeness of all information available. DNB Markets opinions and estimates constitute DNB Markets’ judgment and should be regarded as indicative, preliminary and for illustrative purposes only. Statements in the presentation reflect prevailing conditions and DNB Markets’ opinion at the date the presentation was prepared, all of which are accordingly subject to change. DNB Markets does not warrant that the information in the presentation is exact, correct or complete. The presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, oral briefing provided by DNB Markets. Our research are not and do not purport to be appraisals of the assets, shares, or business of the Company or any other entity. DNB Markets makes no representation as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. This presentation is not an offer or a recommendation to purchase or sell financial instruments or assets, and does not constitute a commitment by DNB Markets to underwrite, subscribe for or place any securities or to extend or arrange credit to or to provide any other services. DNB Markets does not accept any responsibility for direct or indirect losses that are due to the interpretation, and/or use, of this presentation. DNB Bank ASA and/or other companies in the DNB group or employees and/or officers in the group may be market makers, trade or hold positions in instruments referred to or connected therewith, or provide financial advice and banking services in this connection. Rules regarding confidentiality and other internal rules limit the exchange of information between different units in DNB Bank. Employees in DNB Markets who have prepared this presentation are therefore prevented from using, or being aware of, information in DNB Bank and other companies in the DNB group which may be relevant to this presentation. This presentation has been prepared in accordance with the general business terms of DNB Markets, a division of DNB Bank ASA, available at dnb.no/markets.

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