Thursday, June 8, 2017 Stamford, CT USA — Although most analysis of MiFID II’s regulations has focused on the unbundling of research, implementation of the new directive will also have a major impact on trading.

With research fully unbundled from trading, asset managers will select their trading counterparties based solely on their trading prowess as defined by execution performance, liquidity sourcing, algorithmic products, and service. MiFID II also includes new rules specifically addressing trading—including new pre- and post-trade requirements and regulations around dark pool caps and trading venues. 

A new report, The Impact of MiFID II on Equity Trading, from Greenwich Associates examines how these new rules will transform the trading landscape in Europe and beyond.  The report also presents the results of a March/April 2017 study in which Greenwich Associates interviewed 55 buy-side traders and head traders based in Europe about expected changes to their trading workflow following the implementation of the MiFID II regulations in 2018.

“More than half of traders in continental Europe are either undecided on what changes they need to make or are awaiting further clarity” says Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of the report. “This suggests there will be a significant rush to comply and make changes in the second half of 2017.”

Broker Lists Will Get Trimmed
The revamped broker evaluation process in Europe appears likely to create some fallout in broker lists. The traders in the study expect to reduce the number of brokers they use by almost two brokers on average.  Despite the net reduction in broker lists, specialist electronic brokers are expected to see an increased level of business. 

Electronic Trading and Dark Pools Will Get a Boost
Traders expect MiFID II unbundling rules to drive a shift toward low-touch electronic execution channels. More than 40% of the traders expect to increase usage of algorithmic trading, while just 4% expect a decrease. “And despite MiFID II rules being designed specifically to reduce dark pool trading, traders actually expect to increase usage—with 10% expecting a significant increase,” says Richard Johnson. 

TCA Will Gain Prominence
With research removed from the picture, the results of internal Transaction Cost Analysis (TCA) will be the number-one determinant of where to route trade orders, according to the traders in the study. TCA results will also play a key role in meeting MiFID II’s beefed up best execution rules. These changes will increase the importance of TCA to the buy side. More than two-thirds of European buy-side traders expect to increase their usage of TCA next year, and almost half expect to review their TCA system to ensure they have the best tools to allow them to comply with the new MiFID II guidelines on TCA.