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How Systematic Internalizers Will Change Trading

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Breaking Down the Impact of MiFID II on Markets


The transformation of Europe’s financial markets under the new MiFID II rules that took effect Jan. 3 will be accompanied by swathes of new jargon. Two words will be more important than most: systematic internalizers. That’s the name that banks and algorithmic trading firms will now go by when they trade directly with clients. Regulators created the category to impose some rules on the unregulated trading that happens away from public markets, yet exchanges complain that SIs are likely to increase the amount of over-the-counter trading. Banks aren’t complaining.

Any firm that trades with clients using its own capital can register as a systematic internalizer, or SI. In contrast to traditional exchanges or other venues that match multiple client orders, SI venues are designed to fill clients’ buy or sell orders directly. SIs have to use their own capital to meet customers’ demands. It’s old-fashioned market-making, but within a new regulatory framework. Most of the big global banks plan to register as a systematic internalizer in at least one asset class.