Exchanges are venues where investors wishing to buy a financial instrument find investors wishing to sell. The exchange brings together a buyer or seller to effect a trade. Central, to an exchange is the trading system on which trades are executed.
Market surveillance is a topic that sparks some heated debate. Some behaviours, such as the trading strategies adopted by HFT firms, are being targeted by regulators despite a lack of empirical evidence that they are doing anything wrong. This paper summarises the discussion on this and other topics at the autumn 2013 Mondo Visione Surveillance seminar.
As winter marches on , the focus of many families is on the cost of energy. Political pressures on both sides of the Atlantic is ensuring that the operation of the wholesale energy market is a hot topic for debate. Part of that debate is about whether governments can or should intervene in setting energy prices or whether the setting of prices should be left to the market and competition between the various players in the market. As markets become increasingly liberalised, it is important that the integrity of markets is protected. Only then are consumers, particularly the most vulnerable, protected, as it is the weak who suffer the most when marketsare abused.
The model for trading complex products is being tightened up. Regulation, not appetite or business model, determines how or if many risks should be mitigated. Buffers of bonds and cash are being relied upon to provide liquidity if a big firm goes bust. However this new regime is not inspiring complete confidence. The theory that governed the development of the rules did not take account of the effect this added security would have upon market functioning. The liquidity crisis that was triggered after the Lehman Brothers default could be replicated by firms placing higher value on those secure assets that are needed to comply with these rules. There is talk of loosening the strict adherence to highly valuable, liquid assets as a requirement for collateral to support trading over-the-counter (OTC) derivatives. This would ostensibly create more liquidity but it would undermine the security provided by the process of centrally clearing OTC trades in the firstplace.
The Market Quality Dashboard is designed to allow market participants to quantify the economic impact of market design changes on market quality. Market quality is defined by reference to the near universal mandate of regulators, which seeks to ensure that markets are fair and efficient. It therefore follows that, if one intends to change the design of a market place, and get this signed-off by regulators, those changes are evaluated in terms of how they impact fairness and efficiency.
Trading in all asset classes has grown exponentially in volume in the first decade of the 21st century, fuelled by algorithmic trading and high-speed execution. The characteristics of these markets make them increasingly hard to monitor. Changing the process of storage and retrieval could allow regulators to see everything where it sits, getting a picture of the real market. This is the first of two papers looking at how using 21st century tools, regulators and market operators can better police markets.
This paper is based on the discussion and analysis that took place at the annual MondoVisione Exchange Forum that took place in November 2013. It provides an insight into how technology is not just an asset to be leveraged to build profitable businesses, but a key enabler of global competitive markets, providing benefits not just to market participants but those who regulate markets.