Originally pioneered in the ‘80s, pairs trading has become a staple amongst a wide range of investors – from day traders to tier-one asset managers. Despite its ubiquity, the approach to executing pairs has changed very little over time. While algo providers have put huge effort into developing liquidity-seeking algorithms and improving benchmark performance; until recently, very little has changed for pairs.
There is no escaping MiFID II. As the regulation becomes clearer and industry consensus forms, every financial firm is working hard to be ready for 3 January 2018. Alongside implementation, myriad discussion papers address the challenges faced in the new world – where can we trade dark? How will we transaction report? How do we reach millisecond clock precision? Yet few focus on the upside for the industry. This level of regulatory upheaval will have far-reaching implications – some positive, some negative – but, whatever the outcome, we know there will be change, and change connotes opportunity. In this paper, we explore how firms can seize the opportunity and turn regulation from a burden to a competitive advantage.