Whose Liquidity Is it Anyway? – 10th December 2009
First Published Thursday, 10th December 2009 03:06 pm from Fidessa : Fidessa
The opinions expressed by this blogger and those providing comments are theirs alone, this does not reflect the opinion of Automated Trader or any employee thereof. Automated Trader is not responsible for the accuracy of any of the information supplied by this article.
Two events this week crystallised the need for better
pre- and post-trade information.
LSE's decision to set its market to auction mode during
its recent outage.
In a related title="BATS white paper"
target="_blank">white paper on the subject BATS also
claims that "it is questionable whether the market was
orderly on the LSE given publication of data which did not
represent legitimate trading interest or available
liquidity". It would be interesting to find out,
therefore, why the LSE decided to put its market into auction
this time rather than suspending it altogether (as it has when it
has suffered previous outages). But, whatever the LSE's
motivations were, you only have to look at the widening gulf in
fragmentation between the LSE and other European primaries to see
how critical the battle for liquidity in London has now
The crucial issue, however, is
agreeing a mechanism to provide the market with a pre-trade tape
of prices that has an agreed "market outage
protocol", an agreed standard for deciding on
fungibility, and a means of determining which venues to include
or exclude from the tape. Without this it would seem that
effective price formation when a primary market is down is still
some way off. This is especially the case when there is
uncertainty over if or when the primary market will reopen (a
point that is acknowledged in the BATS white paper). Anyway,
rather than deliberate on this, the guys at Fidessa Towers and I
thought we would take the "ask the audience"
option and allow you to make your views known to the trading
community at large.
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The second development was the announcement
(NX) as an MTF and adopt a more transparent approach to
publishing post-trade information by publishing its trades to
Markit BOAT. Whilst Nomura is to be applauded for playing the
game, it's still only a partial solution to the
problem. Other broker dark pools, such as BlockMatch from
Instinet, have taken the MTF high ground, too, but still report
in a different way (BlockMatch trades are printed to the Chi-X
OTC tape, for example). The net result is that it is still pretty
hard for the chaps back at Fidessa labs to assign all these dark
trades to the right categories. This point was highlighted by
"we have very contradictory figures with regard to dark
pools". Maybe I'll ask Santa to put a title="Fragulator"
target="_blank">Fragulator in his Christmas
A point that all venues (primaries,
independent MTFs and broker dark pools) need to remember,
however, is that it's not actually their liquidity in
the first place. Markets have always been about trying to bring
together willing buyers and sellers in order to meet the needs of
both. So, in reality, liquidity belongs to them and not to the
venues. What we need, then, is a clear set of rules for both
pre-trade price dispersal and post-trade reporting. Only then
will the real liquidity owners (market traders) be able to get a
fair deal out of MiFID.