Goldman Sachs Group Inc. will deal in bonds, derivatives, equities and exchange-traded funds through a new type of venue in time for the start of Europe’s MiFID II laws, one of the most wide-ranging trading plans by a bank under the new rules.
Goldman Sachs says it will operate a so-called systematic internalizer from Jan. 3 when MiFID kicks in, joining rivals like JPMorgan Chase & Co. and Deutsche Bank AG in using the status as a way to lift some of the regulation’s most onerous reporting requirements from its trading partners.
By registering as systematic internalizers, or SIs, banks and proprietary trading firms are offering an alternative to a type of bank-run platform that will be banned under MiFID. Most major banks will probably become SIs for at least one asset class. In stocks, they’re controversial because they offer pricing and other advantages. In non-equity asset classes, clients love that SI operators take on trade reporting tasks, possibly the most data-intensive part of MiFID.
“Going into MiFID II, clients have a higher bar on execution quality,” Elizabeth Martin, head of equity execution services and systematic market making in Europe, Middle East and Africa at Goldman Sachs, said in an interview. “When looking at SI partners, clients value our large and diversified equities business. We may hold our positions for days or weeks across a wide universe of underliers - and this translates into less market impact.”
Banks still dominate market making in fixed-income and off-exchange derivatives markets, and there are no ready-made systems to comply with MiFID’s trade-reporting requirements. For some bonds, a trade report needs to be filed within 15 minutes of the trade being executed.
JPMorgan, Deutsche Bank and UBS Group AG have also said they will use SIs to trade securities including equities and fixed income from MiFID’s start date. Most banks will probably become SIs for bond and over-the-counter derivatives to get a jump start on MiFID rules that may force them to register anyway later in 2018. If they wait until they are compelled to become SIs, banks risk irking clients by forcing them to change their working practices twice in the space of a year.
For fixed-income securities, SIs will allow banks to continue offering liquidity directly to clients in largely the same way they do today, says Anish Puaar at Rosenblatt Securities Inc. But it’s a different story for equities, he says, because SIs must compete with exchanges and other trading venues for market flow.
“SIs have advantages over other types of venue in how they can price and tailor liquidity to suit client needs,” said Puaar, Rosenblatt’s European market structure analyst in London. “These benefits could see bank-run SIs gain significant market share in the next 12 to 18 months.”