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What is one of the consequences of trading venues going 'dark' in terms of pre-trade transparency?
Which trading strategy involves posting a limit order at a price slightly more favorable than an existing order?
How does a larger tick size influence trader behavior according to Harris (1996)?
What is the purpose of pre-trade transparency as stated in MiFIR Article 4?
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What kind of risks do parasitic traders pose in relation to large buy orders?
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What does Regulation ATS require from trading venues like Island when increasing pre-trade transparency?
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In multilateral equity markets, what is primarily required for auction mechanisms?
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What impact does going 'dark' have on trading costs in non-Island markets?
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What percentage of trading volume is required for a single venue to remain exempt under the double volume cap?
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Which of the following factors contributes to a structurally more marginal role for pre-trade transparency in non-equity trading?
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Which trading system model is associated with actionable indications of interest that could expose liquidity providers to undue risk?
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Under MiFID II, what is the status of orders pending disclosure in an order management facility?
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What total trading volume limit is set for markets using negotiated trade waivers in relation to all transactions in EEA venues?
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What role does ESMA play in the notification process for waivers in pre-trade transparency?
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What distinguishes post-trade transparency from transaction reporting under MiFID regulations?
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What is the minimum required scale for large orders to be exempt from pre-trade transparency according to the liquidity profile?
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What is the implied requirement for market operators and investment firms when conducting transactions for equity instruments?
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What type of trading venues does MiFIR allow equity instruments to be admitted to?
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What does MiFID II stipulate regarding the timing of trade reporting for equity instruments?
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What is required for non-equity instruments regarding bid and offer prices?
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What does the term 'deferred publication' refer to in the context of non-equity trade reporting?
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Which of the following best describes the calibration process for post-trade transparency in non-equity instruments?
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What is the purpose of requiring trade repositories (TRs) to transmit reports?
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What can potentially suspend the obligation for trade reporting in non-equity securities?
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What has been a significant effect of the removal of concentration rules for secondary markets?
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Which type of market structure does ‘Dealer markets’ classify under?
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Which of the following best describes high-frequency trading (HFT)?
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What benefit do new trading venues entering the market primarily provide?
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What type of trading system is characterized by multilateral execution?
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Which aspect is NOT a feature of the MiFID regulations regarding trading venues?
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Which of the following does NOT directly relate to the concept of Direct Electronic Access (DEA)?
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Which of the following is a potential cost related to the opening up of trading venues?
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What characteristic distinguishes a multilateral matching service from a bilateral matching service?
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In a bilateral matching system, what is a potential consequence of applying discretion in the matching process?
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Which of the following best describes the role of technology in regulation regarding trading venues?
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What is a key feature of a multilateral matching system regarding order admission?
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How does a bilateral matching system typically manage its orders compared to a multilateral matching system?
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What is a primary focus of the MiFID Directive 2004/39/EC?
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Which statement about the access to a trading platform in a multilateral matching service is accurate?
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What is a consequence of the discretionary nature of a bilateral matching service?
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What is one of the goals of trading venue classification according to EU legislation?
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In a multilateral matching service, what factor does NOT influence how orders are matched?
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Which of the following characteristics is associated with auction markets?
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What is a disadvantage of dealer markets compared to auction markets?
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Which component is NOT part of a trading system?
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What consequence can arise from market breakdown due to information asymmetries?
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Which of the following best describes the outcome of the MiFID II & Regulation n. 600/2014?
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What aspect of market quality is emphasized in trading venue classification?
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What is a matched principle transaction mainly designed to provide?
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What is one of the key functions of transparency in financial markets at the macro level?
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Which of the following statements accurately describes the application of fiduciary duties under MiFID II?
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What type of instruments does MiFIR cover regarding pre-trade transparency requirements?
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Which factor is critical to the effectiveness of transparency in mitigating capital commitment issues in bilateral markets?
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In the context of matched principle transactions, what is the role of the facilitator?
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What is the negative aspect of increased transparency highlighted in relation to pre-trade transparency?
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What interaction is explicitly prohibited under MiFID II regarding systematic internalizers (SI)?
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Which condition must be met for an investment firm to be classified as a systematic internaliser under MiFID II?
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What is the primary concern addressed by effective procedures for risk assessment in secondary markets?
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What is the role of contingency arrangements in the context of operational risk management?
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Which of the following statements about trading obligations under MiFIR is true?
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What is a key characteristic that disqualifies a broker-dealer from operating a crossing network under MiFIR?
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Which aspect does outsourcing in the context of investment firms primarily concern?
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What does the term 'OTC exemption' refer to in the context of investment firms executing client orders?
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What are the implications of the concept of 'price discovery' in the context of market trades?
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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.