It is “more costly” and takes more time to execute sizeable orders in European equity markets than it does in North American markets, according to Norges Bank Investment Management (NBIM).

In response to the European Securities and Markets Authorities’ (ESMA) consultation on the MiFID II/MiFIR review report on algorithmic trading, NBIM global head of equity trading and transition, Emil R. Framnes, and NBIM special advisor, Vegard Vik said they have an “interest in encouraging regulatory innovation that contribute to the attractiveness of European markets”.

They welcomed the consultation on algorithmic trading in European markets. Noting that large institutional investors typically trade sizeable orders across many instruments, they said an ideal market is when all participants are present simultaneously and trading is frictionless. However, this is rarely the case and execution will take place over time.

“To execute sizable orders in today’s fragmented and complex equity markets, institutional investors commonly rely on investment firms to trade on their behalf. The investment firms, in turn, rely on trading algorithms to execute those trades. Institutional investors may be able to specify some key parameters of these algorithms to influence the expected trade-offs between urgency and implementation shortfall. The individual trade executions undertaken to fill the investor’s order, however, are decided by the trading algorithm,” they explained.

Vik and Framnes said that market developments such as the use of trading venues operating under transparency waivers and the increased use of periodic batch auctions and closing auctions are features of the marketplace, that when well-constructed, help them access more ‘natural’ liquidity and thus improve overall execution.

“When we compare the execution of trades in European equity markets to similar trades in the North American markets, it is generally more costly or takes more time to execute sizeable orders in Europe. While differences in investor and market structure across these markets contribute to the spread in market liquidity, we believe it should also be a subject of consideration when assessing the regulatory framework for algorithmic trading.”

In addition, on the subject of systematic internalisers, NBIM noted that institutional clients of investment firms conducting algorithmic trading must approve applicable OTC counterparties and trading venues.

“An extension of the definition of algorithmic trading to cover systematic internalisers would facilitate the due diligence and approval of such counterparties for algorithmic trading. The increased trading volume we observe with systematic internalisers implies that their role is becoming increasingly important to the overall trading system and extending the regulatory definition of algorithmic trading to such systematic internalisers may provide adequate regulation,” they stated.

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