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

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Memorandum MiFID II – Pre- and post-trade transparency Spread Sharing Agreements for Fixed Income. The beneficial result would be the rise in execution only brokers or MTFs and the creation of research boutiques for fixed income, similar to equities. However, the overall reason is to unbundle research and execution. This is a main tenant of the buy-side. In summary, the main points to remember are 1. Capitalise d e fi n i t e l y o n p r e v i o u s transparency work done in equities electronic trading to assist in transforming the other asset classes, in particular fixed income. However, ONE SIZE DOES NOT FIT ALL... 2. Always keep foremost in your mind the effect of transparency on the buyside. 3. To borrow from another profession... “Must consider p o s s i b l e h a r m t h a t a n y intervention can do” - Hippocratic oath. _____________________________ Professor Norman Schürhoff Ecole des HEC Université de Lausanne, Senior Chair, Swiss Finance Institute Professor Schürhoff highlighted t h a t p r e - a n d p o s t - t r a d e transparency is a delicate issue in over-the-counter markets. Too much transparency may harm liquidity provision and risk-taking by broker-dealer banks and other intermediaries. Too little liquidity, on the other hand, may also harm i n v e s t o r s a s i t c r e a t e s opportunities for rent extraction. The question is what the optimal degree of transparency is, which is mainly an empirical question. By the very nature of nontransparent over-the-counter markets with bilateral trade, we
Memorandum MiFID II – Pre- and post-trade transparency have little or no data. It is therefore difficult to even observe prices and transactions costs and other measures of market liquidity. A push by the industry for some controlled experiment would be beneficial. In addition, the market and regulatory environment has been changing rapidly over the past decade, partly due to the financial crisis. As a result, financial intermediaries have dramatically reduced their risk-taking activity, which has, at least in the US, led to significant reductions in bond inventories and, thus, in liquidity provision. The industry should therefore be quick to adapt to this changing environment and contemplate alternative forms of trading, such as more electronic request-for-quote systems and other innovations. The US is currently undergoing similar developments. Since there is very little data on E u r o p e a n b o n d m a r k e t s , Professor Schürhoff presented some statistics and findings from US sources on patterns and measures for market quality in OTC markets. This is meant to illustrate how OTC markets currently function. In the US, retail investors participate much more in the bond markets than they do here in Europe. This also means that trading sizes are much smaller. W h a t w e f o u n d w a s t h a t transaction cost for investors were significant. The average cost for a small trade is around 2,5 per cent. For a large trade, which is the most common in Europe, the spread is much smaller. This is the opposite of what we see in equities markets where the transaction cost for large-in-size orders are more significant than for smaller trades. Part but not all of the transaction cost can be explained by the fixed cost of intermediation. The law of one price means that at a given point in time a security should trade at one single price. In markets where there is no transparency we see that this is
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MiFID II â Pre- and post- trade transparency - QED

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