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SI

What is a SI?

Systematic Internalisers are defined by the European regulator as firms which on an organised, frequent, systematic and substantial basis, deals on their own account when executing client orders outside a regulated market. In short its a firm that is dealing frequently using its own capital outside of a trading venue. 

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What types of SI are there?

SI's are split into two categories 

  • Electronic Liquidity Providers (ELPs) 

    • ​Proprietary trading firms that's primary focus is market making on exchanges and providing bilateral quotes to clients via multiple unique real time quote streams. 

    • Example firm: Citadel, XTX and Virtu

  • Bank SIs 

    • Large global banks that run central risk books and tend to have positions inherited from client facilitation. ​​

    • Example firm: JPM, MS, GS and UBS

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​How would I interact with a SI?

  • On exchange - ELP's and Bank SI's provide and remove liquidity on exchange across all of the regulated venues.

  • Quote stream - ELP's will stream bilateral quotes throughout the day to individual clients, each quote stream will be unique to the client in terms of size and frequency of quotes that are streamed. 

  • Bank Algo Suite - The only way you can access a banks liquidity bilaterally is using one of the trading strategies offered in their algo suite.

  • OTC/Negotiated Trades - Historically only Banks SIs offered this service but in more recent times ELPs now offer this service. This would be a trade that the client does against a SI where the price is negotiated for the block of stock the client is willing to buy or sell. Sizes tend to be on the larger side and typically the SI will want to trade the clients full order size.

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Main differences

  • ELPs interact with clients via a quote stream and are more likely to be providing liquidity on exchanges.

  • Bank SIs rely on relationship based trading and internalising internal flow which is mostly traded off venue.

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CFD/Swap Flow

  • Swap trading give clients to equities without requiring ownership of the underlying shares

  • Benefits include

    • No stamp duty and transaction taxes

    • Leverage from bank offering the swap

    • Custody and settlement is done by the bank

  • Banks can treat the client order flow on swap as their own risk, which gives them more flexibility when it comes to internalising order flow.​

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