• Crossing
on and off-orderbook continuously with no minimum size thresholds facilitates lower market impact and potential price improvement; frameworks should welcome crossing, including those matches where the same member legitimately interacts with its own opposite order.
• Derivatives
as risk management tools for fund managers can reduce portfolio volatility leading to returns attributable to stock picking and less to market volatility, and through hedging, can contribute to Cash liquidity and an improved price formation process. Exchange harmonisation of adjustments to derivative contracts in response to corporate actions minimises legal and operational risk, contributing to confidence and liquidity for both OTC and Exchange-traded derivatives.
• Securities Lending
leads to more efficient markets by helping on-time delivery, supporting short-selling trading strategies, and enhancing returns on long positions.
• Tariff transparency and basis point comparabilit
of fees as a proportion of value traded at each of trading, clearing & settlement are meaningful via improving invoices by adding value processed, electronic delivery & better practice. Constructive improvements of front-toback fees include headline cuts, incentives for incremental flow, and simplification, including fair pricing of both sides & reducing/removing minimum fixed costs per trade.
• User choice of CCP
clearing keeps providers nimble on fees & functionality, and scales benefits for order profiles with most affinity.
On this last point, it is worth exploring that in recent years, while Exchange and post-trade costs per trade seem to be declining, if one translates these fees as a proportion of value traded, it becomes apparent that the trend of shrinking order book trade size in many markets, year-on-year, means that the relative cost of trading to process the same level of client flow becomes more expensive on a normalised basis.
The UK provides a prime case study summarised below:
High frequency and algorithmic trading, both on a client agency and proprietary basis, contribute to liquidity growth.
Cash Equities performed well during the recent crisis, coinciding with the growth of on-order book liquidity, particularly in the most successful markets. Figure 1 shows the evidence: in 2008, a record of more than $120trillion value traded on Equities Exchanges and related platforms worldwide. Compare this with the sound-bite of the Credit Default Swap Market, which at the height of open interest measured around $60trillion.
Short-selling bans, irrespective of whether a good idea or not, had the unintended technical consequence of curtailing liquidity.
Figure 2 shows a significant drop in 2009 in annual value traded regionally and around the world. Figure 3 provides a comparison of regional capitalizations and monthly value traded reflecting figures from the World Federation of Exchanges.
Global Equities 2010 : The Liquidity FIX
