Systematic Internaliser on a wire

MiFID II imposes simple categories on a complex trading landscape, such as on- and off-exchange, or multi-lateral vs. bi-lateral. Obviously having some rules helps unravel complexity, but too many kills innovation. Walking this tightrope is not easy.

Internalisation comes in two flavours. Either you have an order from a customer, agree a fixed price and then try to unload the position over time. Or, perhaps you receive two opposing orders at the same time and match them with no risk to yourself.

Depending on where the Level 2 discussion ends up, potentially only the first workflow will be supported under the SI regime. Some respondents to the discussion paper argue that ESMA should ban riskless principal trades from SIs, as they are more akin to multi-lateral exchange trading. Others see both flows firmly in the realm of the SI. Others again sit somewhere in the middle accepting both flows under the SI regime, however requiring the SI identity to be published for riskless trades. Granting anonymity to a SI is after all a privilege that supports brokers taking positions to facilitate large trades. However, for brokers not carrying any risk, that privilege seems redundant and publishing their identity for riskless principal trades should be less of an issue.

The next step is publication of the upcoming consultation paper by ESMA, expected by end of December or beginning of January and rumoured to be 1,500 pages. This will give us some more clarity as to where the tightrope we are all on will actually lead.

3 Responses to “Systematic Internaliser on a wire”
  1. Robert Aldridge says:


    I am confused by this. For the riskless principal example, the initial trade filled on risk at an agreed price, should fit under the exclusion for trading obligations, in that this trade is ad-hoc and non systematic. The subsequent unwind of this risk will be almost certainly carried out via regulated market trades/mtf/OTC 3rd party broker – all covered by the trading obligation rules. I do not see where the SI element fits in? If a firm is an SI then, again, they are not limited to offering the client a price linked to the quote as the size is almost certainly going to be above the SMS thresholds (assume institutional client).
    Are you able to help me understand the point made here?

  2. Hi Robert, many thanks for your comment.

    You describe an initial trade filled with a subsequent unwinding on the market. To me this sounds like a house fill against the client and your own hedging afterwards. There is nothing to stop you doing that, as long as you can monitor and prove that you stay below the quantitative threshold for systematic and frequent. If you exceed the quantitative limits, then you would be required to become an SI.

    A riskless principal trade occurs if you match two opposing client orders. There is no subsequent hedging in the market and you carry no market risk. There is a debate whether those types of trades should be permissible under the SI regime.

    Finally, I agree with your point on the prices. If your client’s order is above the quoted size, you have more discretion. To be fair, even where the order is below quoted size, ESMA highlights in their advice to the European Commission the possibility to provide price improvement to orders in justified cases.

    Best regards

    • Robert Aldridge says:


      Many thanks. The bit I am missing is where all the documentation ties in the obligation of an SI to the requirements of a firm regards trading obligations. There are reams of documentation on SI, and notes on trading obligations. However I cannot find a coherent document on the responsibility of a firm that is an SI in relation to actions like risk filling

      My point in my original query was that I believe that despite being an SI a firm may still operate as today, by risk filling clients, without necessarily having to consider the quoted prices/size. As risk fills for example fall outside the trading obligations of a firm in that they will always be non systematic and ad-hoc.

      So although a firm maybe providing a firm quote to the world, it may still risk fill a client outside of the quoted price, or at least without reference to the quote.

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