MiFID II – Pre- and post- trade transparency - QED

Memorandum
MiFID II – Pre- and post-trade transparency
Crossing networks provide the
buy-side with a choice of any
variation between light and dark. It
is all dependent on the order itself.
Now, he fact that the sell-side
uses words like dark is not very
helpful. Dark sounds shady, as if
someone is doing something that
is not right. Dark should be
replaced by anonymous. Clients
do not know who the other side of
t h e t r a d e i s a s t h e y a re
anonymous. Anonymity prevents
market impact and information
leakage and that is the whole
point of executing in a dark pool
or any other dark mechanism.
Algorithms in a way can do the
same thing. They take large
orders and break them up into
slices, which helps with market
impact. Again, assisting the buyside
by not having their trade
impact market prices.
Important to note, there are
execution practices that work
today and are currently making
markets liquid. This is particularly
evident when you see synergies
between equities and fixed
income. For example, there are
similar (but definitely not exact)
methods of sourcing liquidity. With
equities one can use IOIs
(Indications of Interest) and Trade
Adverts for liquid fixed income
instruments one can search for
liquidity on Bloomberg (such as
AllQ). There are similar services to
be found on TradeWeb or Market
Access. Choice is vital to the buyside
when sourcing liquidity.
However, his does not mean that
some additional controls would
not be of benefit.
The biggest examples of when
transparency can be harmful and
when waivers are necessary in
facing off against transparency is
large in scale and illiquid orders.
Illiquid orders are orders that are
rarely traded or are instruments
where there are very few market
makers. If there are few market
makers, In the case of a few
market makers, they certainly will
not make a price if they have to
be transparent because the
minute they do so it will damage
their market making ability and
adversely affect their client.