Trading Venues P1 Flashcards
(17 cards)
what are the terms of buttonwood agreement?
- stocks traded at no less than a quarter commission
- precedence in trading to all other brokers
what are the benefits of concentrating trading activity?
reduced search costs, and increased
liquidity, through network externalities:
o The more traders participate, the easier it gets to find someone
wishing to trade at any given market condition
o The higher the liquidity, the more traders will participate
what was concentration rule and why was it abandoned?
-retail orders in financial instruments had to be executed on
stock markets, back then mostly national (“concentration rule”)
-However, mandatory concentration reduces competition, and
increases trading fees. Mifid 1 removed it allowing
* Competition among stock exchanges
* Competition between stock exchanges and other trading venues
there is a trade-off between network externalities (concentration of trading) and competition. the second aspect is often preferred. what are remedies introduced to curb the absence of network externalities?
- New trading venues to capture part of OTC trading
- Trading obligations as a partial, but competition-friendly,
substitute of concentration rules - Enhanced pre- and post-trade transparency to:
- Foster consolidation of order books
- Reduce dark pool trading
which are the 2 types of TVs?
regulated markets (RMs) and multilateral trading facilities (MTFs) which are the only 2 venues in which equity instruments can be traded (there is a third for bonds)
what are commonalities between RMs and MTFs?
- No bilateral trading – operators cannot trade on their own, not even on matched principal basis
- Matching cannot involve discretional elements (all elements of
market microstructure to be predefined in protocol) - Admission to trading is an essential element of RMs (only open to market operators)
- Some MTFs perform a scrutiny for admission to trading, some
others just offer additional trading service for financial
instruments admitted elsewhere (open to market operators and investment firms)
what are differences between RMs and MTFs?
RM and MTFs mostly differ because of the regulatory regime
* As the nature of what they do is very similar it is up to the undertaking to decide whether to be subject to a regime which is more protective for investors:
* Prospectus
* Transparency (major shareholding disclosure; periodic reporting)
* Shareholder rights for listed companies
* Other regimes are identical, however (e.g. market abuse)
what are OTFs? commonalities and difference with the other trading venues?
Organised trading facilities
commonalities
-multilateral system
-open to market operators and IFs
difference
- match may happen based on discretionary basis (OTF may decide when to place a received order and whether to match it)
- reserved for bonds, structured finance products, emission allowances or derivatives
- bilateral trading allowed in case of matched principal (with client consent)
what are SIs?
Investment firms which, on an organised, frequent, systematic and
substantial basis, deal on own account when executing client orders
outside trading venues.
-frequent and systematic: number of OTC trades in the financial
instrument carried out on own account when executing client orders
-substantial: measured either by the size of the OTC trading carried in relation to the total trading of the investment firm or to the total trading in the EU in a specific financial instrument
what is the main difference between SIs and TVs?
SIs must engage in principal trading and cannot do
that through mere interposition (so, no “matched principal trading”)
for SI. the same is prohibited for TVs and OTFs (mostly).
Rationale:
* Conflict of interest in case of principal trading for TV
* Position risk justifies reduced transparency for SI
what are the 3 activities of trading venues?
Listing
data vending
trading
what are requirements for listing?
o Admission to trading by RM, based on ability of financial
instruments to be traded fairly, orderly, efficiently (MiFID II)
o Prospectus approval by competent authority: sufficient initial
information for admission to trading
what are challenges and issues related to the listing function?
-Reduced relevance as a conduit for equity capital
-Focus on monitoring, as opposed to allocation
- Are MTF free-riding on RMs’ listing activity? Or can RM listing
fees reflect higher liquidity?
-Are RM subject to inherent conflicts of interest when deciding on
admission to listing? → If so, do we need a public listing authority?
which are the 4 trading systems?
-Order driven: An order book matches sell orders with buy orders on the basis of best available price on a continuous basis
-Quote driven:Transactions concluded on the basis of firm quotes continuously made available to participants, which requires the market makers to maintain quotes in a size that balances: (i) the needs of members and participants to deal in a commercial size and (ii) the risk to which the market maker exposes itself
-Periodic Auction
- Request-for-quote: Quotes provided in response to a request submitted by other participants. The quote is executable exclusively by the requesting member or market participant
which factors help improve liquidity when there is no concentration rules? (and network effects)
- trading obligations: orders must be directed to TVs and SIs for shares and derivatives
-pre-trade transparency: quotes/order books must be public for all financial instruments
-best execution also helps liquidity (by concentrating orders in venues with lower fees) when IFs act as agents.
What type of orders are excluded from trading obligations?
their characteristics include that they:
o are non-systematic, ad-hoc, irregular and infrequent; or
o are carried out between eligible and/or professional
counterparties and do not contribute to the price discovery
process
which are differences between trading obligations and concentration rules?
trading obligations are:
-Less far-reaching than concentration rule, as it enables
competition among TVs
- only Applies to regulated entities (investment firms, banks, others
providing investment services)
