If you work in a markets job in Europe, something dark and foreboding is lurking on the horizon. It seemed it would never arrive, but is now approaching with alarming alacrity: MiFID II will be implemented from January 2018. Everyone knows about the unbundling horror for equity research jobs. Less has been said about the upheaval for equities salespeople and traders.
Jason Rand, global head of execution services at Mirabaud Securities, says the change is already proving dramatic. "We’re embarking on one of the biggest market structure overhauls in history," Rand tells us. "The complexity of the trading landscape is about to increase exponentially."
If you work in sales and trading, you need to get prepared. Surviving MiFID II will not be simple.
If you want to keep your sales trading job after MiFID II, you'll need an intimate understanding of the new structure of the market. Richard Johnson, an expert on market structure at Greenwich Associates says the traders and sales traders who'll be in demand in future will be those who intimately understand the new mechanics and routing requirements. For example, MiFID II places restrictions on the use of dark pools and is therefore expected to lead to increased trading through systematic internalizers (investment firms that match buy and sell orders in-house but do so publicly) and to a rise in "conditional orders", which use algorithms to test the possibility of trading in dark pools but don't always commit.
"People on the sell-side will need to educate people on the buy-side in how to route trades and how to make the best use of all the venues available," says Johnson. "Are you going to use a dark pool? Which systematic internalizer is best for this trade? The buy-side is asking for help with this from client-facing folks at the brokerages."
The most desirable sales traders have already adapted to this new landscape says Rand: "They have strong client relationships, they understand products, and they understand how those products will trade under the new markets structures of MiFID II... Sales traders need to provide a consultancy and advisory service to clients trying to navigate MiFID II and combine this with a platform for liquidity.”
It's no longer just about being best buddies with your clients.
Since MiFID I, anyone with a markets job in Europe will be familiar the principle of transaction cost analysis (TCA) - effectively, ensuring that trades take place at the best price for clients.
Under MiFID II, however, TCA will be taken to a whole new level as brokers become obliged to take "all sufficient" rather than "all reasonable" steps to ensure that a trade takes place in the most efficient way possible.
The upshot is that anyone in a sales and trading system will need to be extremely familiar with TCA systems and analytics. Most banks and big buy-side firms have advanced TCA systems in place already, but Johnson says smaller buy-side firms are lagging: "Historically, only the big buy-side firms could afford this, but it's a skillset that even smaller firms will need to be familiar with."
MiFID II is expected to lead to further consolidation in the equities sector. Greenwich's research suggests that 45% of buy-side firms plan to reduce their broker lists as a result of the regulations, while only 13% plan to increase them. The bigger and more profitable your employer, the more likely it is to survive. "Smaller broker-dealers might well decide that the compliance and technology expense of running a trading desk isn't worth it," says Johnson. These firms might stop trading altogether and become independent research providers, he suggests.
In an attempt to cut costs, some smaller brokerage firms are also buying-in so-called "white label" algorithms from third party providers.
The companies providing these algorithms insist they're all the rage: "If someone uses our algo, they can have it trade the same way across their broker list - we can plug it into a broker's system," says one of the new algo salesmen. "That's compelling under MiFID II because it's easier to justify why you're using particular brokers for execution - you don't have to keep repeating the TCA analysis."
Johnson, however, is not so sure: "If you're a client that's choosing a broker based on the quality of its execution, why would you choose one that uses out-sourced algorithms?" If you're working for a small broker, he suggests you're better off going for one that offers excellent liquidity and employs sales traders who bring a "high touch" service to demanding clients.
The new definition of high touch isn't just about knowing the product. It also means understanding how electronic trading systems will work under the new market structure (the kinds of skills traditionally associated with low touch salespeople who sell the systems rather than trade ideas).
"MiFID II is going to encourage the fusion of high and low touch skills, which has been happening for sometime," says Johnson. "In order to educate clients, sales traders are going to need to be very knowledgeable about the new landscape. They're going to need to understand routing and systematic internalizers and to combine this with a detailed knowledge of markets and products." (Again, see point one.)
At the same time, recruiters say MiFID II is encouraging demand for a new kind of salesperson to work on "global liquidity solutions" desks. - These are desks which sell all the highly liquid products that can be traded electronically. They are staffed by people who have both a high touch and a low touch perspective and who can work across equities and liquid fixed income products. J.P. Morgan's new New York-based global liquidity solutions desk is a case in point. "Banks will need salespeople who can sell any liquidity product," says one director. "It's not going to be about being a product specialist any more."