Read to gain insight from ITG perspectives and proprietary research on best practices in trading and portfolio analytics.
The previous installment of “Badges” equates them to definitions of market participants. The focus was on a CFTC-proposed definition of high frequency trading, or HFT. The conclusion reached is that strict classifications for the purpose of regulation are inappropriate in today’s environment. The idea is broadened here, with respect to market structure regulation. In this week's edition of The Blotter, the focus is on the exchange/broker divide.
Crossing systems, now often called ‘dark pools,’ were early developments in the evolution of electronic trade execution. Investment Technology Group’s (ITG) POSIT® system, for example, came on the scene as early as 1986. Although POSIT’s list trading mechanism is highly sophisticated, the basic mechanics behind single stock crossing are simple and easily understood.
This study represents the first performance analysis of European venues since the implementation of MiFID. Alternative trading markets are found to add value relative to primary markets, lowering trading transaction costs.
The European securities regulators are currently reviewing the impact that their MiFID regulations have had in the marketplace, and have invited proposals to address a number of issues ranging from the standardisation of OTC derivatives to post-trade transparency standards and the consolidated tape.
Dark pools are on the global regulatory stage. The European Parliament considers recommendations for new dark pool regulation, similar to those issued by the Committee of European Securities Regulators. They in turn advise the European Commission, as Europe heads towards MiFID II. The Australian Securities and Investments Commission issued a report in November, addressing crossing systems.
Financial regulation lives on the legally assigned characteristics of participants. The definitions of broker-dealer and exchange provide the underpinning of U.S. regulatory fabric and yet it took almost 30 years to craft a definition for ‘the alternative trading system’. Herein lies a lesson: a world in which technology, product strategy, and business models evolve faster than language may be a poor place to apply regulation based on participant silos. Market structure expert, Ian Domowitz, considers this issue and regulatory alternatives in this week’s edition of The Blotter.
Starting May 26th the Australian regulator (ASIC) had new market integrity rules (MIR) relating to pre-trade transparency exceptions coming into affect. Rule 4.2.1 of ASIC MIR (Competition in Exchange Markets) was revised to introduce tiered thresholds for block trading (also known as “Block Specials” or just “Specials”), while also introducing meaningful price improvement exception to pre-trade transparency (replacing the “at or within the spread” exception) under rule 4.2.3.
Article 21 of the Markets in Financial Instruments Directive (MiFID) requires investment firms to “assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether they need to make changes to their execution arrangements."
If you believe that Dodd-Frank and its myriad of spinoff proposals are confusing, please open door number two and enter the world of European regulatory reform.
Dark pools, on aggregate, add significant value relative to lit markets when measured in terms of execution efficiency. A detailed analysis shows differences in performance across the different types of dark pools as well as certain niches in which they excel. In general, fragmentation and overall market performance as measured by execution efficiency don’t seem to degrade relative to results from the pre-MiFID era. MiFID II proposals can further enhance the ability of market participants to accurately measure the different liquidity pools.