June 12, 2019 The Incumbents Strike Back: MiFID II in May Tim Cave TABB Group Follow | Profile | More Share Lit venues in Europe’s equity market hit back during May. Collectively, primary markets and traditional closing auctions accounted for 67.3% of all on-exchange equities volume in May, their highest level in a year. Meanwhile, in the off-exchange market, activity on systematic internalisers stalled. TABB Group analyst Tim Cave reviews the highlights of TABB’s May European Equities LiquidityMatrix, including the market share for each major equity execution channel. Europe’s incumbent equities exchanges made a comeback of sorts in May, accounting for their highest proportion of on-exchange activity in a year. Collectively, primary markets and traditional closing auctions accounted for 67.3% of all on-exchange equities volume in May, their highest level since May 2018 (see Exhibit 1, below). Exhibit 1: Order Book Market Share in EU Equities Source: TABB Group and big xyt Part of the rebound was driven by the continued rise of activity at the close – an area in which primary exchanges still have an effective monopoly, but where there are growing calls for change. Activity in closing auctions reached their fourth-highest level in the MiFID II era, accounting for 20.5% of on-exchange activity. Lit MTFs – the venues run by the likes of Cboe Europe, Turquoise and Aquis that have been challenging incumbent exchanges for so long – saw record-low market share in May, with 22% of on-exchange activity. These venues have been hit by the secular rise of closing auctions, new innovations such as periodic auctions and a rebound in dark volumes as the amounts of stocks subject to MiFID II’s dark pool caps fall. Despite the overall fall in lit MTF volumes, there was one notable development: The continuous lit order book operated by Aquis Exchange overtook by value-traded the equivalent market run by rival Turquoise for the first time. There were also some intriguing changes in the off-exchange market. Overall, activity on systematic internalisers (SIs) – the regulatory designation for capital commitment – stalled. Addressable daily notional SI volumes fell to €8.7 billion, compared with €9.6 billion in April, with their market share falling, from 14.6% to 13.8% of total volumes. Underneath the surface of the SI activity, there were some interesting trends. TABB Group breaks down addressable SI activity into three buckets: The first is addressable SI activity above the large-in-scale (LIS) thresholds, which we assume to be largely undertaken by banks and is referred to as “manual SI” activity; the second is addressable SI activity below the LIS thresholds undertaken by banks, which we refer to as “electronic SI bank” activity; and the third is addressable SI activity below the LIS thresholds and undertaken by electronic liquidity providers (ELP), which we refer to as “electronic SI ELP.” Manual SI activity fell, from €6.15 billion to €5.4 billion, but it has been within a range of €4.5 billion to €5.5 billion a day for a while now (see Exhibit 2, below). Electronic bank SI activity is steadily increasing – it jumped from €1.87 billion to €2 billion in May – with its growth in recent months appearing to be at the expense of ELP SI activity. The combined average daily volumes of the six SIs run by electronic liquidity providers that report to TABB Group fell, from €1.48 billion to €1.3 billion. Exhibit 2: Addressable SI Activity in EU Equities Source: TABB Group and big xyt Volumes on ELP SIs had been progressively increasing until a couple of months ago. Periodic auctions aside, the emergence of ELP SI liquidity has been one of the most novel parts of MiFID II in the equity market, and it is still very much an area in its infancy. Volumes continue to fluctuate, both among individual ELP SIs and the banks that are executing with them. New ELP SIs continue to gear up, and brokers are still connecting to these new sources of liquidity. While Tower Research Capital has been the largest ELP SI by value-traded since April 2018, its rivals have been jostling for position from month to month. During May, Citadel Securities traded a record €306 million a day, helping it leapfrog Jane Street to become the second-largest ELP SI by value-traded. Average daily volumes on Virtu’s SI dropped, from €58.9 million to €15.9 million, in May as it decreased volumes to work on optimizing its model. It is likely changes of this sort will continue for some time as ELP SIs and brokers constantly refine and calibrate their models. All these changes and more are covered in the May 2019 edition of TABB Group’s European Equities LiquidityMatrix™, which provides the industry with breakdowns of market share for each major equity execution channel, including lit venues, dark MTFs, block venues, periodic auction books and systematic internalisers. Please contact TABB Group for more information.