Two joint ventures in different corners of the trading world announced this week show that collaboration could prove key when it comes to complying with incoming rules under the EU’s revised Markets in Financial Instruments Directive.
Bats Europe, the region’s largest stock exchange, has partnered with the US-based Bids Trading to launch a new European platform for large-sized equity trades. Meanwhile, the UK-based interdealer broker Tullett Prebon is working with fledgling derivatives exchange Gmex on a new foreign exchange options platform that combines traditional voice trading with electronic techniques.
They are two of many partnerships launched in recent months spanning asset classes and trading processes. While each is quite different, the underlying rationale is the same – marry the technology, product or local market expertise of one firm with the recognised brand, or client base, of another to help comply with a regulatory issue.
Mifid II, coming into force in 2018, will have a profound effect on European market structure, bringing more transparency across the trading lifecycle, from the way investment research is purchased, to the execution of orders and how trades are reported, cleared and settled.
Even without a specific trading or clearing mandate, products are likely to move voluntarily into centrally-traded or cleared environments because the attendant workflow will help satisfy regulatory requirements around price dissemination and reporting – and this fact is a driver of many of the tie-ups.
David Perkins, managing director of electronic broking at Tullett, told FN: “The general theme of all of the regulations seen globally is around improved transparency. With Mifid II specifically, we’re seeing a requirement for improved pre-trade and then post-trade transparency. The best way of achieving that is to electronify your workflows.”
In the case of one of Bats’s tie-ups, with interdealer broker Icap, the regulatory agenda pulled together firms operating at opposite ends of the trading spectrum. Bats is an equities specialist at heart, while Icap’s expertise is in brokering illiquid derivatives contracts between major banks.
The two firms formed an alliance in April 2015 designed to allow Icap’s clients to clear certain derivative contracts through Bats’s trade reporting service. According to a July 19 statement, Icap routed more than €212 billion of notional equity baskets through the service for clearing during the financial year ended June 30.
Although just one part of the vast derivatives market, the tie-up proved that over-the-counter markets can adapt quickly to more exchange-like practices. Garry Stewart, deputy CEO of Emea broking at Icap, said it was “a unique solution for a market which has seen limited innovation since it was founded”.
In Bids, Bats has found a more a natural partner. Bats was in need of a block trading solution, while Bids sought a foothold in Europe for the first time. Bats will licence Bids’s technology to faciliate block trading, and deal with ancillary processes such as clearing and settlement itself.
Regulation, again, was the driving force. Larger trades, favoured by institutional investors, typically take place off-exchange where they do not alert the wider market.
Mifid II will limit the amount of trading that can take place off-exchange, unless those trades are above a certain size.
Cue a rush of solutions to facilitate block trading – an area in which Bids has a strong reputation in the US. Crucially, the company also has connectivity with a range of customers, particularly on the buyside. It is a smart move by Bats, as it means time-starved buyside traders will not have to get their heads around another piece of trading kit.
Mark Hemsley, Bats’s CEO, said: “We looked around and Bids has the best solution, it was really an ideal partnership.”
The other benefit of partnerships is trust: they can help bring a degree of credibility to emerging technology, as evidenced by the Tullett-Gmex tie-up. While Tullett has huge experience in FX options trading, some of its technology was in need of an update. Gmex, meanwhile, has a shiny new system to equip voice brokers with the tech needed to source liquidity in competitive markets.
Hirander Misra, CEO of Gmex, told FN: “As far as we’re concerned, fintech at Gmex isn’t merely the automation of an existing manual process. It’s all about an improvement on what you have. It’s all about solving a real world problem.”
Expect more partnerships to emerge in the effort to meet new regulatory requirements over the coming months – the ones that succeed will of course be those that satisfy both regulatory and, crucially, commercial requirements.