Internally crossed trades are limiting market transparency, and more significantly lack regulatory oversight to assess the problems they may be creating, delegates at TradeTech in Paris were warned on Tuesday.
“Is the increase in internalisation a good thing? I think it’s questionable – and probably not,” said Sam Railton, director of business management EMEA, at Tower Research Capital Europe.
Currently, there is no reporting of bilateral crossing of trades to regulators, panellists said, creating challenges for any awareness of the risks created by these trade executions.
Chris Jackson of Liquidnet, “If internalisation means that there’s more liquidity, it is probably a good thing. But if it’s not going to get reported, then no one knows that liquidity is there. A US investor looking at this market sees that FTSE 100 seems liquid, but for anything outside that there’s nothing clearly going on.”
One area highlighted as problematic, is the market close, where increasing levels of activity have created a concentration of liquidity around the closing auction, and which can trigger price moves which negatively impact asset owners.
James Baugh, “[Looking at] the close, there’s clearly a significant amount of business that’s not done on the primary auction, the unintended or otherwise consequences of that is we’re seeing increased volatility In the closing auction, to the detriment of the end investors, those passive index funds that have benchmarked to the close.”
That means firms must be aware of opacity if they cannot get direct visibility of the market, in order to manage the ‘known unknown’ dynamic.
He said, “We see that volatility more acute where those primary markets operate are much more transparent closing model, which gives an indication of the activity we see now into the close. If it is 25% or 50%, of volume on a rebalance day, you’ve just got to be aware that if a bunch of business is done somewhere else, it’s going to impact your experience when interacting with liquidity.”
Barriers to transparency also potentially impact the effect of innovation, which are designed to boost access to liquidity.
Jackson said, “If we look at the RFQ platform, RFQ is providing important and interesting liquidity in difficult to trade names. But when that prints, it’s not in a transparent way. So actually, RFQs is starting to solve that liquidity problem, but no one knows that they are. So a huge part of post trade transparency part is to let the market evolve be it with a market maker or anyone else, but let people know about it.”
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