Systematic internalisers—when the quiet corners of the market get new rules

DEEP LOOK | Recent regulatory moves may have reduced systematic internalisers’ post-trade reporting obligations – but have also introduced new responsibilities with the possibility of more to come.

In April 2025, the European Securities Market Authority (ESMA) published analysis of the evolution of trading in European equity markets between 2022 and 2025, based on the Markets in Financial Instruments Regulation (MiFIR) transaction reporting data. The analysis suggested that although these markets function well overall, there was a decline in lit continuous trading between 2022 and 2025 – a decline that has been offset by increased activity in other trading mechanisms, including systematic internaliser trading. 

The regulator’s March 2026 report on trends, risks and vulnerabilities notes that the share of trading in European Economic Area (EEA) lit markets decreased in the second half of last year by 4.8 % relative to the previous six month period, while systematic internaliser trading activity was up 2.6%.

ESMA is seeking input on the concept of addressable liquidity and its treatment under RTS 1 (Regulatory Technical Standards on equity transparency), including possible adjustments to the post‑trade transparency flagging framework.

Why now?

The latest review of the systematic internaliser regime has to be viewed in the context of the European Commission’s efforts over many years to find a balance in the market. These firms are often depicted by other market operators as only marginally contributing to the price formation process since, although they have pre-trade transparency obligations, they use prices formed on multilateral venues to place their bid and offer quotes.

Cynics might suggest that the Commission is justifying imposing constraints by saying it just wants to boost volumes on multilateral venues that contribute more effectively to the price discovery process.

“Exchanges are keen to limit systematic internaliser trading to larger sizes,” says Hayley McDowell, head of European market structure at RBC Capital Markets. “The changes to pre-trade transparency obligations in the EU will force these firms to quote and trade in larger size and restrict their ability to offer price improvement. But it is unlikely that the activity in smaller size will shift to the lit order book.”

She reckons the new limitations could put investors in the EU at a disadvantage as systematic internalisers rethink their approach and potentially withdraw from quoting in certain stocks, impacting access to risk liquidity and ultimately execution outcomes.

On tape

“In the European Commission’s proposal on MiFID, there was the idea to reinforce the pre-trade side of the equity consolidated tape where the version that is to be put in production by probably 2027 would integrate some aggregated and anonymised free trade, so best bid and offer for trading venues,” explains “The systematic internaliser regime in our opinion did not bring the expected improvements,,” says Stephane Giordano, public affairs at Société Générale.

The proposal in the EU Market Integration and Supervision Package is that the subsequent version of the tape would allocate best limits with systematic internalisers potentially contributing to that. There is a demand from some market participants – primarily multilateral venues – that on the post-trade side, systematic internalisers would have to contribute on an attributed basis.

“Currently, when these firms contribute to post-trade transparency they do so with a generic identifier,” says Giordano. “The requirement for this contribution to be made under the name of each firm is obviously something they strongly oppose because it could create the risk of having their position known by the marketplace and hence by arbitragers.”

He adds that although the proposal has only a limited chance of being retained, there is an ongoing debate around this issue.

The level of interest in remaining a systematic internaliser in the non-equity space is hard to assess because many entities have already chosen this status under MiFID II/MiFIR to ease the trade reporting burden on their clients as this reporting is to be done by the designated publishing entity, suggests Giordano.

Market participants also need to consider the possible actions to be taken by the European Commission as part of its drive to enhance market integration. While the European Union’s executive branch seems to have rowed back from any suggestion of radical changes such as mandating connection between venues, for example, it may still make further changes to those recommended by the MiFID II/MiFIR review.

“It may be difficult to have a clear view on what the constraints are going to be, even in the near future, given the potential for further evolution of the regulations,” says Giordano.

For Raiffeisen Bank International (RBI), the MiFID regime stands for investor protection and transparency, which adds value to clients and markets observes Roman Primetzhofer, head of capital markets business management.

“The systematic internaliser regime in our opinion did not bring the expected improvements,” he says. “We will resume providing liquidity in our core markets in the fixed income and derivatives space and will continue to be a systemic internaliser for structured products.”

New model, higher liquidity?

Primetzhofer reckons the voluntary framework introduced in November 2025 could attract more market makers and therefore bring higher liquidity to the markets and the end client.

“The new model could potentially increase the number of market makers outside of the group of tier 1 banks, which we expect to be positive for all market participants,” he adds. “The relief of regulatory requirements reduces operational burdens and costs, thereby making it more attractive for small and medium-sized banks to provide liquidity.”

Regulators have been looking at the proportion of traded activity that falls within the systematic regime compared to other execution mechanisms for some time and have clearly come to the conclusion that it is a meaningful proportion.

As a result, they have made a number of adjustments to the regulations around SIs in terms of tick sizes, quoting requirements and the ability to execute at the midpoint in an attempt to control the proportion of total market activity traded this way.

Managing risk

The problem, according to one industry executive at a quant trading firm, is that there are many different business models that fall under this umbrella.

He expressed support for principles-based regulation and any change that reduces the number of organisations becoming systematic internalisers for the sole purpose of undertaking post-trade reporting. However, he also believes the latest overhaul of the regime will make it harder to undertake genuine risk taking activity and refers to the upcoming changes to minimum quote size requirements in Europe to reinforce his point.

“If a quote has to be available to anyone and not just bilaterally, it is obviously harder to risk manage that because you might be willing to provide certain prices and sizes to a particular counterparty but not all counterparties,” he says.

Pre-trade vs post-trade transparency

Inevitably, both the UK Financial Conduct Authority (FCA) and ESMA have suggested that the latest changes will improve market transparency, although it is important to make the distinction between pre- and post-trade transparency.

There is a case to be made that it is almost impossible to have meaningful pre-trade systematic internaliser transparency, because liquidity is intentionally tailored to individual counterparties, not one-size-fits-all. 

An executive from a systematic internaliser suggests the regulatory focus should instead be on improving the accuracy of post-trade transparency and ensuring that similar types of activity are reported post-trade in the same way.
“If a market participant wants to trade on risk today, that trade could be printed as OTC under certain circumstances; it could be printed as systematic internaliser; it could be printed as off-book on exchange; or it could even be undertaken on an MTF as a one-to-one RFQ,” he adds. “Harmonising these scenarios will be important to providing the market with meaningful post-trade transparency.”

Another systematic internaliser told PostTrade360 that if there were three things to pick out that would help clean up post-trade tape, they would be:

– Mandating the use of some optional market model typology (MMT) post-trade flags to force firms to provide as much granularity as possible, such as the distinction between manual and automated trades

– Removing duplication by considering the UK as equivalent from a trade reporting/approved publication arrangement perspective

– Standardising reporting to make the systematic internaliser regime the vehicle for reporting genuine bilateral risk taking activity

What’s next?

When asked whether it needed to do more to improve the accuracy of post-trade transparency and ensure that similar types of activity are reported post-trade in the same way, an FCA spokesperson told PostTrade360 that chapter four of its July 2025 consultation paper on the systematic internaliser regime for bonds and derivatives asked discussion questions related to the quality of post-trade reporting.

“Based on the responses, we will make targeted proposals as part of our forthcoming consultation on equity market structure and transparency, due for publication in summer 2026,” he says. “The wider operation of the systematic internaliser regime was another of the issues covered in this chapter and we are considering whether further adjustments would be appropriate.”

Primetzhofer reiterates that RBI is of the opinion that the relief of regulatory requirements and the reduction of operational burdens and costs could attract small and medium-sized banks to provide liquidity.

“Regarding the regulatory framework though, the deferral flags restrict post-trade transparency by postponing the time of publication – for example in the case of large-in-scale orders (orders or block trades that exceed specific regulatory size thresholds),” he says. “The market remains divided on if and when these deferrals are appropriate.”