Trading Venues P2 Flashcards
(20 cards)
what are the positives of TV competition?
- lower fees and costs
- better trading services
- more transparent and visible order books
- broader investor choice
what is the difference between pre and post trade transparency?
pre trade: publications of bid/ask prices and their depth (building block of the order book)
post trade: publication of price, volume and time of execution of executed orders (building blocks of the trading tape)
what are transparency requirements in equity markets for different types of TVs and SIs
RM and MTF: pre trade transparency + waivers and post trade transparency + deferrals.
SIs: pre trade transparency + obligation to publish quotes and post trade transparency + deferrals.
Pure OTC orders: post trade transparency + deferrals.
what are transparency requirements in non-equity markets for different types of TVs and SIs
RMs, MTFs and OTFs: pre trade transparency + waivers and post trade transparency + deferrals.
SIs: pre trade transparency + obligation to publish quotes up to size specific for the financial instrument and post trade transparency + deferrals.
Pure OTC: post trade transparency + deferrals.
what is the difference in pre and post trade transparency requirements for equity and non equity instruments? why?
-different pre trade transparency requirements, waivers and deferrals.
this is because liquidity is structurally different between the 2 markets, bond instruments are only liquid at inception and near maturity.
difference in transparency requirements for TVs and SIs
TVs: multilateral systems–> typically subject to lower
position risk → enhanced transparency obligations
SIs: bilateral basis → typically subject to
high position risk → reduced transparency obligations
differences in position risk between liquid and illiquid markets
The more illiquid the market, the higher the position risk of the few
brave traders that make their trading intention public
what are benefits and issues with disclosure requirements?
they improve liquidity but create exposure to position risk, this is the reason why limited trading in dark pools is allowed.
which orders are exempt from transparency requirements (waivers)
large orders can happen in dark pools, additionally they can be held in the order management facility pending disclosure (iceberg orders). this happens when the relevant authority deems it necessary (eg in case of high market illiquidity)
which orders get deferred post trade transparency? what is deferral?
transactions that are large in scale compared with the
normal market size. Usually post trade disclosure happens ASAP, in case of deferral it might be postponed.
what is data vending? what are pricing rules on it?
Sale of pre- and post-trade information at reasonable commercial
conditions
- For free after 15 minutes
- Price regulation: production/dissemination costs + reasonable margin
what is the main risk related to HFTs and algorithmic trading?
- they amplify downward shocks (knight capital flash crash) HFTs’ selling orders have triggered selling orders by other HFTs determining a situation of “hot potato” → snowball effect for stop-loss functionality.
what is HFT?
HFT is a trading technique characterised by:
* infrastructure intended to minimise network and other types of latencies (including at least one of the following : co-location, proximity hosting or high-speed direct electronic access);
* system-determination of order initiation, generation, routing or
execution without human intervention for individual trades or orders;
* high intraday rates of orders, quotes or
cancellations
what is the frequency threshold to qualify as a HFT?
- at least 2 messages per second with respect to any single financial
instrument traded on a trading venue; - at least 4 messages per second with respect to all financial instrument
traded on a trading venue
Firms should review their trading activities at least on a quarterly basis to self
assess whether an authorization requirement has been triggered over the
course of the period in question
mifid rules on algorithmic trading
Mifid 2 art 17:
*Investment firms’ trading software should be resilient, and with sufficient capacity to stand peaks in trading volumes (stress-tested)
*Investment firms should have business continuity systems
(backup devices) to ensure their trading activity is not subject to
sudden interruptions
Governance requirements for algorithmic traders?
- Methodology to develop and test algorithms to ensure these do not
behave in an unintended manner (black box) - Testing environment separate from production environment (actual use) and systems to stress test the algorithms
- Filters that embed pre-trade limits
- Real-time monitoring and post-trade controls of algorithms’ behavior
what are duties of HFT market makers?
HFT market makers bound to tightened duties of liquidity
provision:
* Duty to perform their activity in
predefined period, with the result
of providing liquidity on a regular
and predictable manner
* By posting firm, simultaneous two-way
quotes of comparable size at competitive prices
what are registration requirements for algorithmic traders?
- NCA may ask info on algorithmic
trading strategies and parameters - Investment firms shall have in
place registration systems for all
orders and cancellations
what are the duties of trading venues when it comes to dealing with HFTs?
- Trading venues shall have in place resilient systems
to cope with peaks in order volumes - Trading venues should ensure rejection of orders
that exceed thresholds or are clearly erroneous (fat
finger errors) - Calibrated circuit breakers should ensure trading is
halted when volatility is excessive - Algorithm testing as market access requirement
- Trading venues hall adopt fair and non
discriminatory rules on co-location - Trading venues hall make sure that orders
generated by algorithmic trading shall be
flagged
how are incentives to HTF curbed in TVs?
Fees: should give no incentives to cancel orders if
this results in disorderly trading, as a consequence Market operators may charge canceled orders and/or HFT (as such) more than other orders.
* Rebates only allowed in favor of market makers
* Cap to ratio of unexecuted orders to transactions
