Trading Venues

Question 1

What do trading venues do?

Answer 1

Facilitate the buying and selling of financial instruments.

Question 2

What did MiFID I change regarding the concentration rule?

Answer 2

It banned the optional concentration rule to enhance competition among trading venues.

Question 3

What is liquidity fragmentation?

Answer 3

A situation where trading activity is dispersed across multiple platforms, reducing overall liquidity.

Question 4

What are some remedies to curb the side effects of fragmentation?

Answer 4

• New trading venues for OTC trading
• Trading obligations as substitutes for concentration rules
• Enhanced pre- and post-trade transparency

Question 5

What is pre-trade transparency?

Answer 5

The publication of current bid/offer prices and their depth before transactions occur.

Question 6

What is post-trade transparency?

Answer 6

The publication of price, volume, and time of executed transactions after they occur.

Question 7

What are the forms of trading venues?

Answer 7

• Regulated Markets (RMs)
• Multilateral Trading Facilities (MTFs)
• Organized Trading Facilities (OTFs)
• Systematic Internalizers (SIs)

Question 8

What distinguishes RMs from MTFs?

Answer 8

The regulatory regime they are subject to, with RMs having more stringent requirements.

Question 9

What is an Organized Trading Facility (OTF)?

Answer 9

A multilateral system for trading non-equity instruments without mandatory non-discretionary rules.
* only for bonds, structured financial products, emmissions allowances or derivatives
* may matched prinipal trade

* OTF exercise discretion when deciding (i) to place or retract an order

) not to match potentially matching orders

Question 10

What is a systematic internalizer (SI)?

Answer 10

An investment firm, on an organised, frequent, systematic and substantial basis, that deals on its own account when executing client orders outside trading venues.

Question 11

What does the listing function of trading venues entail?

Answer 11

The process of admitting financial instruments for trading based on regulatory compliance.

Question 12

What are the challenges facing the listing function?

Answer 12

• Reduced relevance as a conduit for equity capital
• Focus on monitoring rather than allocation
• Potential free-riding by MTFs

Question 13

What is algorithmic trading?

Answer 13

Trading where a computer algorithm determines order parameters with limited human intervention.

Question 14

What characterizes high-frequency trading (HFT)?

Answer 14

• Infrastructure minimizing latency
• Automated order management
• High message intraday rates

Question 15

What are the risks associated with high-frequency trading?

Answer 15

• Amplifying market trends
• Contributing to market volatility
• Potential for operational failures

Question 16

What does MiFID II say about algorithmic trading?

Answer 16

Investment firms must ensure their trading software is resilient and capable of handling peak trading volumes.

Question 17

What is the regulatory aim regarding market data?

Answer 17

To achieve a consolidated tape for the sale of pre- and post-trade information.

Question 18

What is the impact of transparency on liquidity?

Answer 18

• Lower search costs
• More informative prices
• Potential exposure risk for traders

Question 19

What are the implications of dark trading?

Answer 19

It can reduce overall market transparency but may also protect traders’ positions.

Question 20

What is a waiver in the context of trading transparency?

Answer 20

An exemption from transparency requirements, often for large transactions.

Question 21

What is the role of trading obligations under MiFID II?

Answer 21

Mandate routing of orders to regulated markets, MTFs, and systematic internalizers.

Question 22

What are the essential elements of order-driven trading systems?

Answer 22

Matching sell orders with buy orders based on the best available price continuously.

Question 23

What is a characteristic of orders in high-frequency trading (HFT)?

Answer 23

Orders have often a very short life (cancellation)

HFT typically involves quick decision-making and execution, leading to frequent order cancellations.

Question 24

What does Article 17 of MiFID II emphasize regarding algorithmic trading?

Answer 24

Investment firms’ trading software should be resilient and with sufficient capacity to stand peaks in trading volumes (stress-tested)

This regulation aims to ensure that trading systems can handle extreme market conditions.

Question 25

What should investment firms have to ensure continuity in trading activity?

Answer 25

Business continuity systems (backup devices) ## Footnote These systems are crucial for preventing interruptions in trading operations.

Question 26

What is required for the testing environment of algorithms?

Answer 26

Testing environment separate from production environment ## Footnote This separation helps prevent unintended consequences during live trading.

Question 27

What are the monitoring requirements for algorithms?

Answer 27

Real-time monitoring and post-trade controls of algorithms’ behavior ## Footnote This ensures that any issues can be promptly addressed.

Question 28

What are HFT market makers required to do?

Answer 28

* Duty to perform their activity in predefined period => providing liquidity in regular and predictable manner * By posting firm, simultaneous two-way quotes of comparable size at competitive prices ## Footnote This ensures liquidity is provided on a regular and predictable basis.

Question 29

What can National Competent Authorities (NCA) request regarding algorithmic trading?

Answer 29

Info on algorithmic trading strategies and parameters ## Footnote This oversight helps ensure compliance and market integrity.

Question 30

What registration systems must investment firms implement?

Answer 30

Registration systems for all orders and cancellations ## Footnote This is important for tracking trading activity and ensuring transparency.

Question 31

What are the requirements for trading venues regarding order volumes?

Answer 31

Resilient systems to cope with peaks in order volumes ## Footnote This helps maintain market stability during high trading activity.

Question 32

What should trading venues ensure regarding erroneous orders?

Answer 32

Rejection of orders that exceed thresholds or are clearly erroneous ## Footnote This is essential for maintaining order integrity and market efficiency.

Question 33

What is the purpose of calibrated circuit breakers in trading?

Answer 33

Ensure trading is halted when volatility is excessive ## Footnote Circuit breakers are mechanisms to prevent market crashes.

Question 34

What should TV have in place for Algorithim governance

Answer 34

* black box to test algorithms * testing environment separate from production environment * filters that embed pre-trade limits * realtime monitoring and post trade control of algorithms behavior ## Footnote This ensures that only compliant algorithms are allowed to trade.

Question 35

What type of rules must trading venues adopt regarding co-location services?

Answer 35

Fair and non-discriminatory rules ## Footnote This promotes equal access to trading technology for all participants.

Question 36

What must be flagged by trading venues for algorithmic trading?

Answer 36

Orders generated by algorithmic trading ## Footnote This helps in tracking and monitoring algorithmic activity.

Question 37

What is the limitation on rebates in trading?

Answer 37

Rebates only allowed in favor of market makers ## Footnote This supports liquidity provision in the market.

Question 38

What is capped in relation to orders and transactions?

Answer 38

Cap to ratio of unexecuted orders to transactions ## Footnote This measure helps to maintain a healthy trading environment.

Question 39

What are the aspects of pre-trade information to consider?

Answer 39

Calibration of equity/non-equity; TV/SI; liquidity conditions ## Footnote These factors affect trading decisions and execution.

Question 40

What is the distinction made in trading waivers?

Answer 40

Lit vs dark trading ## Footnote This refers to the visibility of trades in the market.

Question 41

What type of information is important post-trade?

Answer 41

* price * volume * time ## Footnote This data is essential for analyzing trading performance and market behavior.

Question 42

What is a Regulated Market

Answer 42

Multilateral system which facilitates the bringing together of ] multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules –in respect of the financial instruments admitted to trading under its rules and/or systems

Question 43

What is a multilateral trading facility

Answer 43

Multilateral system which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract

Question 44

Rules about RM and MTF

Answer 44

* no bilateral trading * matching cannot involve discresional elements * RMs - sysemd where trading interests meet but execution o/s system * admission to trading - required for RM, MTF some perfoem scrutiny others just offer insturments admitted elsewhere

Question 45

What distiguishes the regulatory regimes for RMs from MTFs?

Answer 45

RMs are more closely scrutinized: * Prospectus * Transmparancy * shareholder protections

Question 46

What is required to be listed

Answer 46

* Admission to trading by RM, based on ability of financial instruments to be traded fairly, orderly, efficiently (MiFID II) * Prospectus approval by competent authority: