A new report from the Futures Industry Association (FIA) has asserted that improved transparency could reveal otherwise hidden liquidity in Europe’s equity markets, potentially boosting the regional market’s perceived value to investors and issuers.
“A perception of larger, more vibrant secondary markets in Europe will contribute to strengthening EU and UK primary markets, as market depth and liquidity are key factors for companies considering listing their stock via an initial public offering (IPO),” the report says. “If the real story regarding European equity volumes was clear for all to see, this would present a much more appealing market environment for those seeking to invest and raise capital, supporting economic growth for the entire region.”
The report observes that sell-side firms who execute hedging trades for equity trading internally, using synthetic instruments via an internal systematic internaliser (SI) are not obliged to report these trades to the market, and this creates a ‘hidden’ pool of liquidity.
“If the executing broker chooses to execute its hedge inside its own Internal SI e.g., against another hedge of a synthetic instrument in its own SI, the resulting ‘trade’ relating to the investor’s order has the broker as both the buyer and the seller, and as such, there is no trade that is recognised under the MiFID PTT framework for printing to the market,” the report, written by the FIA’s European Principal Traders Association, observes. “This is how the transparency gap comes into being.”
This issue is not irresolvable, the Association writes, as the transparency regime of the Markets in Financial Instruments Directive (MiFID II) could be used to commit firsm to reporting this activity.
“Simple technical changes to the MiFID II Post Trade Transparency (PTT) regime would bring this activity to light, boosting reported European equity volumes so that they better reflect the actual levels of addressable liquidity and economic interest available in European markets today,” the report notes. “The scale of this non-reportable activity is known to be material but is unfortunately unquantifiable at this stage due to being unreported. Bringing these volumes into the scope of the MiFID II post-trade transparency framework will, therefore, give a more accurate and (given the significant size relative to the other execution scenarios) a more positive picture of European equity volumes”
This is not the first time internal SIs have been observed to cause transparency issues. In 2018, a survey by Liquidnet found 41% of buy-side respondents were unable to track the FIX data which denotes how a broker is routing to an internal SI and just 38% know if the broker SI is onward routing to an external SI.
©Markets Media Europe 2024
