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.