Pre-Trade and Post-Trade Transparency
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Pre-Trade and Post-Trade Transparency

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Questions and Answers

What is one of the consequences of trading venues going 'dark' in terms of pre-trade transparency?

  • Reduction in trading activity and price discovery (correct)
  • Higher levels of trading fees for participants
  • Increased visibility of all market orders
  • Enhanced competition among trading venues
  • Which trading strategy involves posting a limit order at a price slightly more favorable than an existing order?

  • Gapping order strategy
  • Order matching strategy (correct)
  • Volume-based strategy
  • Market making strategy
  • How does a larger tick size influence trader behavior according to Harris (1996)?

  • Increases the likelihood of order cancellation
  • Prompts traders to display their orders more frequently (correct)
  • Reduces the effectiveness of algorithmic trading
  • Encourages traders to conceal their orders more
  • What is the purpose of pre-trade transparency as stated in MiFIR Article 4?

    <p>To make public current bid and offer prices along with market depth</p> Signup and view all the answers

    What kind of risks do parasitic traders pose in relation to large buy orders?

    <p>They exploit large orders through front-running techniques</p> Signup and view all the answers

    What does Regulation ATS require from trading venues like Island when increasing pre-trade transparency?

    <p>To publicly display their limit order book</p> Signup and view all the answers

    In multilateral equity markets, what is primarily required for auction mechanisms?

    <p>Pre-trade disclosure of quotes</p> Signup and view all the answers

    What impact does going 'dark' have on trading costs in non-Island markets?

    <p>They decline as market share is redistributed</p> Signup and view all the answers

    What percentage of trading volume is required for a single venue to remain exempt under the double volume cap?

    <p>Less than 4%</p> Signup and view all the answers

    Which of the following factors contributes to a structurally more marginal role for pre-trade transparency in non-equity trading?

    <p>Dominance of counterparty risk</p> Signup and view all the answers

    Which trading system model is associated with actionable indications of interest that could expose liquidity providers to undue risk?

    <p>Request-for-Quote (RFQ) System</p> Signup and view all the answers

    Under MiFID II, what is the status of orders pending disclosure in an order management facility?

    <p>Pending disclosure according to specific regulations</p> Signup and view all the answers

    What total trading volume limit is set for markets using negotiated trade waivers in relation to all transactions in EEA venues?

    <p>8%</p> Signup and view all the answers

    What role does ESMA play in the notification process for waivers in pre-trade transparency?

    <p>Mediates in case of disagreements among authorities</p> Signup and view all the answers

    What distinguishes post-trade transparency from transaction reporting under MiFID regulations?

    <p>Post-trade data is public, while transaction reports are confidential</p> Signup and view all the answers

    What is the minimum required scale for large orders to be exempt from pre-trade transparency according to the liquidity profile?

    <p>Larger than normal market size</p> Signup and view all the answers

    What is the implied requirement for market operators and investment firms when conducting transactions for equity instruments?

    <p>Price, volume, and time of executed transactions must be made public.</p> Signup and view all the answers

    What type of trading venues does MiFIR allow equity instruments to be admitted to?

    <p>Regulated markets (RMs), Multilateral trading facilities (MTFs), and Other trading facilities (OTFs).</p> Signup and view all the answers

    What does MiFID II stipulate regarding the timing of trade reporting for equity instruments?

    <p>Reports should be delivered as close to real-time as technically possible, ideally within one minute.</p> Signup and view all the answers

    What is required for non-equity instruments regarding bid and offer prices?

    <p>Current bid and offer prices, along with the depth of trading interests, must be publicly available.</p> Signup and view all the answers

    What does the term 'deferred publication' refer to in the context of non-equity trade reporting?

    <p>Delayed reporting for non-equity transactions exceeding a specific volume, postponed until the end of the trading day.</p> Signup and view all the answers

    Which of the following best describes the calibration process for post-trade transparency in non-equity instruments?

    <p>Calibration must be performed instrument by instrument based on individual liquidity measures.</p> Signup and view all the answers

    What is the purpose of requiring trade repositories (TRs) to transmit reports?

    <p>To avoid double-reporting and ensure accurate data aggregation.</p> Signup and view all the answers

    What can potentially suspend the obligation for trade reporting in non-equity securities?

    <p>The trading volume falling below a specific liquidity threshold.</p> Signup and view all the answers

    What has been a significant effect of the removal of concentration rules for secondary markets?

    <p>Fragmentation of trading venues</p> Signup and view all the answers

    Which type of market structure does ‘Dealer markets’ classify under?

    <p>Bilateral execution</p> Signup and view all the answers

    Which of the following best describes high-frequency trading (HFT)?

    <p>Using complex algorithms for trading at high speeds</p> Signup and view all the answers

    What benefit do new trading venues entering the market primarily provide?

    <p>Enhanced liquidity in niche segments</p> Signup and view all the answers

    What type of trading system is characterized by multilateral execution?

    <p>Continuous limit order books</p> Signup and view all the answers

    Which aspect is NOT a feature of the MiFID regulations regarding trading venues?

    <p>Limiting the number of market makers</p> Signup and view all the answers

    Which of the following does NOT directly relate to the concept of Direct Electronic Access (DEA)?

    <p>Restricting user access to trading platforms</p> Signup and view all the answers

    Which of the following is a potential cost related to the opening up of trading venues?

    <p>Increased fragmentation leading to inefficiencies</p> Signup and view all the answers

    What characteristic distinguishes a multilateral matching service from a bilateral matching service?

    <p>It does not match orders against proprietary capital.</p> Signup and view all the answers

    In a bilateral matching system, what is a potential consequence of applying discretion in the matching process?

    <p>The establishment of a fiduciary mandate.</p> Signup and view all the answers

    Which of the following best describes the role of technology in regulation regarding trading venues?

    <p>It is regarded as neutral in assessing services.</p> Signup and view all the answers

    What is a key feature of a multilateral matching system regarding order admission?

    <p>It uses objective criteria available in advance.</p> Signup and view all the answers

    How does a bilateral matching system typically manage its orders compared to a multilateral matching system?

    <p>It may trade against its own proprietary capital.</p> Signup and view all the answers

    What is a primary focus of the MiFID Directive 2004/39/EC?

    <p>Opening up markets and enhancing investor protection</p> Signup and view all the answers

    Which statement about the access to a trading platform in a multilateral matching service is accurate?

    <p>There is no discretion involved in granting access.</p> Signup and view all the answers

    What is a consequence of the discretionary nature of a bilateral matching service?

    <p>It allows for the possibility of best execution obligations.</p> Signup and view all the answers

    What is one of the goals of trading venue classification according to EU legislation?

    <p>To minimize liquidity fragmentation and ensure transparency</p> Signup and view all the answers

    In a multilateral matching service, what factor does NOT influence how orders are matched?

    <p>Client discretion over trade execution.</p> Signup and view all the answers

    Which of the following characteristics is associated with auction markets?

    <p>Price informational efficiency</p> Signup and view all the answers

    What is a disadvantage of dealer markets compared to auction markets?

    <p>Higher levels of transaction costs</p> Signup and view all the answers

    Which component is NOT part of a trading system?

    <p>Market surveillance tools</p> Signup and view all the answers

    What consequence can arise from market breakdown due to information asymmetries?

    <p>Loss of market functionality</p> Signup and view all the answers

    Which of the following best describes the outcome of the MiFID II & Regulation n. 600/2014?

    <p>Increased emphasis on pre-trade transparency and market integrity</p> Signup and view all the answers

    What aspect of market quality is emphasized in trading venue classification?

    <p>Ensuring fair treatment and non-discrimination among participants</p> Signup and view all the answers

    What is a matched principle transaction mainly designed to provide?

    <p>Access to clearing and post-trade anonymity</p> Signup and view all the answers

    What is one of the key functions of transparency in financial markets at the macro level?

    <p>Monitoring systemic risk</p> Signup and view all the answers

    Which of the following statements accurately describes the application of fiduciary duties under MiFID II?

    <p>Best execution must be considered during matched principle transactions.</p> Signup and view all the answers

    What type of instruments does MiFIR cover regarding pre-trade transparency requirements?

    <p>Equity and equity-like instruments</p> Signup and view all the answers

    Which factor is critical to the effectiveness of transparency in mitigating capital commitment issues in bilateral markets?

    <p>Pre-trade information sharing</p> Signup and view all the answers

    In the context of matched principle transactions, what is the role of the facilitator?

    <p>To execute both sides of the transaction without exposure to market risk</p> Signup and view all the answers

    What is the negative aspect of increased transparency highlighted in relation to pre-trade transparency?

    <p>Market impact due to exposed orders</p> Signup and view all the answers

    What interaction is explicitly prohibited under MiFID II regarding systematic internalizers (SI)?

    <p>Communicating with MTFs and RMs</p> Signup and view all the answers

    Which condition must be met for an investment firm to be classified as a systematic internaliser under MiFID II?

    <p>It must trade frequently and systematically on its own account.</p> Signup and view all the answers

    What is the primary concern addressed by effective procedures for risk assessment in secondary markets?

    <p>Identifying and monitoring operational risks and conflicts of interest.</p> Signup and view all the answers

    What is the role of contingency arrangements in the context of operational risk management?

    <p>To provide a backup plan in case of disruptions.</p> Signup and view all the answers

    Which of the following statements about trading obligations under MiFIR is true?

    <p>Exemptions from trading obligations exist for infrequent and irregular trades.</p> Signup and view all the answers

    What is a key characteristic that disqualifies a broker-dealer from operating a crossing network under MiFIR?

    <p>Executing trades without client orders involved.</p> Signup and view all the answers

    Which aspect does outsourcing in the context of investment firms primarily concern?

    <p>The provision of 'non-core' operational services without quality compromise.</p> Signup and view all the answers

    What does the term 'OTC exemption' refer to in the context of investment firms executing client orders?

    <p>An exception for trades that do not involve third-party orders.</p> Signup and view all the answers

    What are the implications of the concept of 'price discovery' in the context of market trades?

    <p>It serves to enhance the efficiency and transparency of traded prices.</p> Signup and view all the answers

    Study Notes

    Pre-trade Transparency

    • Limited pre-trade transparency (around 8-10%)
    • Double Volume Cap (DVC) for Dark Venues:
      • Applicable only to reference price and negotiated trade waivers
      • Single venue volume < 4% of all EEA transactions
      • Global volume < 8% of all EEA transactions
      • If DVC breached, trading suspension within 2 days, for at least 6 months
    • Derogations for non-equity instruments:
      • Large in scale orders (LIS)
      • Liquidity profile (including type and number of market participant)
      • Market model/trading system (e.g. quote driven, RFQ)
        • Size Specific To Instrument (SSTI): actionable indications of interest above a size specific to the financial instrument, considers retail or wholesale investors
    • Notification process for waivers : ESMA can mediate disputes, but its opinion is not binding.

    Post-trade Transparency

    • Different from transaction reporting, which is confidential information for supervisory purposes
    • Equity instruments:
      • Public disclosure of price, volume and time of executed transactions
      • Includes shares, actionable IoIs, Equity-like instruments
    • Non-equity instruments:
      • Public disclosure of current bid and offer prices and depth of trading interests
      • Includes bonds, structured finance, derivatives, etc.
    • Time limits for trade reporting:
      • Close to real time (within 1 minute)
      • No similar obligation on investment firms (IFs) for post-trade reporting
    • Flag for entity or automated system executing transactions (e.g. algo trading)
    • Non-equity transparency calibration:
      • Instrument by instrument for liquidity measures (e.g., frequency of trades)
      • Suspension of the obligation if below the liquidity threshold
    • Other requirements:
      • Avoiding double-reporting with trade repositories (TRs)
      • Aggregate net exposures by leveraging on existing facilities (TRs under EMIR)
    • Deferred publication for non-equity if exceeding standard dimensions and specific volume (no later than the end of the day).

    Pre-trade Transparency in Multilateral (Auction) Equity Markets

    • Trading venues shall make public current bid and offer prices and the depth of trading interests
    • Quotes need to be published even in the absence of trade (i.e.expired quotes)
    • Pre-trade disclosure is necessary for auction mechanisms
      • SEC enforced Regulation ATS requiring Island ECN to comply with display requirements in ETFs
      • Island chose to go "dark" and no longer display its order book, resulting in lower trading and price discovery
      • Trading costs (effective spreads) declined in non-Island markets.

    Market Impact Risks

    • Parasitic traders may seek to exploit large buy orders by front-running or using order matching strategies
    • Harris (1996): Traders are more likely to display orders when the tick size is larger, as front-running becomes more costly.
    • Large order triggering may be less frequent with a larger tick size, as parasitic traders have to arrive first in the order book.

    Trading Value Chain

    • Trading value chain includes: investors, brokers, exchanges, and clearing houses.

    The removal of ‘concentration rules’ for secondary markets

    • The gradual removal of ‘concentration rules’ for exchanges across the world has opened up the trading infrastructure services and multiplied the number of trading platforms.
    • ‘Concentration rules’ limited the number of exchanges that could operate in a given market.

    Benefits and costs of opening up

    • Benefits: New trading venues entering especially in the ‘blue chips’ segment. Explicit execution costs dropped.
    • Costs: Fragmentation of markets, liquidity fragmentation, and potential market disruption.

    Trading venue classification

    • Objective of the classification: minimise cream skimming and protect market quality and integrity.

    A ‘trading system’

    • Three components: Matching system, Organization of trading sessions, and Information systems.
    • Matching system has three main types: Order-driven, Quote-driven, and Request For Quote.
    • Organization of trading sessions can be continuous auctions or batch auctions.
    • Information systems can include pre/post trade data disclosure.

    Multilateral matching service

    • Multilateral market is a setting whereby a market operator or an investment firm operate as a riskless counterpart that brings together on a systematic basis all sorts of buying and selling interests.
    • Multilateral matching system doesn't apply discretion in the matching system, admission of products to trading, and access to the platform.
    • Multilateral matching system relies on rules and objective criteria available ex ante.
    • Multilateral matching system DOES NOT have a fiduciary mandate vs clients.
    • Multilateral matching system DOES NOT match orders against proprietary capital or trade on its own account.

    Bilateral matching service

    • A ‘bilateral matching system’: Applies discretion to either matching, admission products to trading or access to the platform, May trade against proprietary capital, May give rise to a mandate between the client and the intermediary, and It is de facto a non-neutral counterpart.

    SI’s key characteristics

    • SI (Systematic Internalizer) executes client orders outside a RM, MTF or OTF without operating a multilateral system.
    • SI's execute client orders against own capital unless under the OTC exemption.
    • SI's apply fiduciary duties (best execution).
    • SI's must have the same organizational requirements for RMs and MTFs.
    • SI's cannot interact with other SIs.

    Mapping trading venue types

    • Trading venues can be organized in a hierarchical manner, from the most transparent to the least: RM (regulated market), MTF (multilateral trading facility), OTF (organized trading facility), and SI (systematic internalizer).

    Trade reporting

    • Trade reporting is crucial for price discovery, market integrity, and investor protection, as well as monitoring systemic risk.

    Greater transparency

    • Transparency is important for price discovery and market integrity and investor protection.
    • Two transparency regimes in MiFID: pre-trade and post-trade.

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    Description

    This quiz explores the key concepts of pre-trade and post-trade transparency in financial markets. It covers important regulations such as the Double Volume Cap (DVC) for dark venues and derogations for non-equity instruments. Additionally, the quiz discusses the distinction between transaction reporting and transparency requirements.

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