MiFID II and the relationship between public markets and systematic internalisers

This paper seeks to examine the evolution of the systematic internaliser (SI) regime in the context of the evolving regulatory landscape. A key goal of Markets in Financial Instruments Directive II (MiFID II) was to increase transparency in equity markets. The new regulations included curbs on dark trading, commonly referred to as the ‘double volume cap’, and introduced the trading obligation for equity and equity-like instruments, which effectively removed the category of ‘organised trading facility’ (OTF) for equity trading. This change essentially outlawed broker crossing networks (BCNs), removing one of the most widely used execution mechanisms since the original MiFID implementation in 2007. Regulated markets, multilateral trading facilities (MTFs) and systematic internalisers retained their ability to trade equities under the new regime. The suggestion that the removal of BCNs may lead to a very significant increase in SI activity has resulted in regulatory scrutiny. BCNs were used to cross client interest while SIs rely on principal liquidity to execute client orders and thus there are fundamental differences in the activities within both mechanisms. Moreover, there are concerns a network of interlinked SIs could negatively affect the transparency of equity markets, contrary to the spirit of the new regulations and deplete liquidity from lit markets.