Definition of systematic internaliser

The Markets in Financial Instruments Directive (Mifid), launched in November 2007, is the European initiative to promote competition and enhance choice for investors across Europe.

Mifid replaces rules in many markets that require trades to be executed at local exchanges. Instead, banks will be allowed to act as "systematic internalisers", matching customer orders internally rather than showing these to the market.

Systematic internalisers (SIs), traditionally called market makers, are investment firms who could match “buy” and “sell” orders from clients in-house, provided that they conform to certain criteria.  Instead of sending orders to a central exchange such as the London Stock Exchange, banks can match them with other orders on its own book.  Examples of such firms are Credit Suisse and UBS.

SIs are able compete directly with stock exchanges and automated dealing systems, but they have to make such dealings transparent.  They have to show a price before a trade is made. After a trade is made, they have to give information about the transaction, just like conventional trading exchanges.

The rise in competition to local exchanges has also created quite a few 'Multilateral trading facilities' (MTFs - these allow parties to trade among themselves away from the exchanges), where trades can be directed to and which are taking market share away from some of the established exchanges such as the London Stock Exchange (LSE). [1]

Jury still out on Mifid’s impact

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