The next drive for Electronic Trading innovation is not Low Latency – It’s Liquidity

Read highlights from our exclusive in-depth interview with Brian Gallagher, MD at Morgan Stanley for Electronic Trading, Europe, or watch the full video below.

DMC: What do you expect then the main changes coming from MiFID II are likely to be and realistically, how significant do you think its effects are going to be on the industry?

BG: There’s been talk about the equity markets and transparency, but MiFID is not just about the equity markets; it’s about all asset classes. I think really, its very difficult right now to judge the failures and the successes of MiFID, when you look at the background of 2008. You’ve had clearly tremendous amounts of financial chaos that really nobody could have predicted. So, to judge MiFID with that 2-year period as part of the lifecycle isn’t necessarily fair. But I think what everyone wants to do at this point is avoid a MiFID III review in 3 or 4 years’ time. So clearly we want to make sure that the market continues to be transparent where it’s needed.

One of the issues that we look at is broker crossing, which is this new defined category of OTFs within the commission paper. So there are areas of concern, but I think there’s still a lot more debate and dialog that’s going to go in and we’re fairly supportive of most of the initiatives within the consultation paper, but once again, it’s always going to be the details in working with both other market participants, the regulators, and the European commission to make sure that we can conduct our business and be as transparent to the market as possible.

DMC: What approach do you then take to the whole high-frequency trading environment when executing your buy-side client’s trades?

BG: I think as we’ve looked at high frequency trading, there are different needs. There are clients that are low latency-focused, but for the buy-side institutions that we service I think it’s more liquidity-focused. So our clients are going to come in and demand tremendous amounts of the day’s liquidity in certain situations. We want to reduce the potential impact they cause and still get the best price. We’ve done things within the algorithms to make sure that we put minimum trade sizes on there and were randomizing how we place their orders in the marketplace.

DMC: Do you reckon that the high-frequency trading is good or bad or somewhere in the middle?

BG: It’s been tarred with such a negative brush, but the reality in the matter is it’s certainly an important part of the market; it’s not going away nor should we want it to go away. Right, wrong or indifferent in the US; the numbers are about 60% of the volume. Here in Europe, I’ve heard numbers at 40%. An independent group came out with a 70% number; I think that’s a little bit too high. But to remove that in its entirety would cause some impact in the marketplace itself.

I think as we’ve looked at the European commission’s paper, it’s attempting to define high-frequency trading. From our standpoint, let’s step away from trying to define it because very loosely, you could look at statistical arbitrage, or you could look at some of the algorithms that a bank would employ or that a buy-side firm would employ and you could deem it to be high-frequency trading, where we think the right focus should be is on the abusive order types that exist in the marketplace; things like quote stuffing, layering of the book; those are things that we think should be pressed on in the commission paper.

DMC: In the US, the Dodd Frank came in very quickly, but in Europe it seems regulatory reforms often take a long time to get going. Has the uptake of MiFID so far being slow to catch on in your opinion, and are the new reforms likely to speed up the adoption rates?

BG: I think there’s a balance between the two markets and the two regulatory regimes. I think the US has always been very much a rules-based environment whereas you’re principles based. So going back to the point I made earlier; markets will continue to evolve and taking the time to get it right so that we’re not continually going through this year after year after year is key.

High Frequency Trading and MiFID II will of course be the hottest topic on discussion at TradeTech Liquidity and TradeTech Nordic  this November.  For more details email tradetech@wbr.co.uk or call +44 207 368 9465.

If you found this article interesting, you may also want to read:

http://www.thetradetechblog.com/equity-trading/mifid-to-expand-into-non-equity-markets-says-dr-kay-swinburne-mep/

http://www.thetradetechblog.com/equity-trading/top-tip-stick-to-your-plan-to-not-stick-to-your-plan/

http://www.thetradetechblog.com/financial-regulation/what-to-expect-from-mifid-ii/

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