6.VI Bottom-up versus top-down

Even if one determines what the ‘optimal’ degree of equity post-trade transparency is, one should wonder how this is best achieved. Should the desired degree of equity post-trade transparency be achieved through market forces (i.e. bottom-up), regulation (i.e. top-down), or a combination of both? Similar arguments are relevant as is the case for equity pre-trade transparency. It can be argued that the market itself (e.g. RMs or MTFs) knows best what degree of equity post-trade transparency is preferable, and accordingly the decision whether or not to publish post-trade data should be left to the market. Consequently, a self-regulatory approach (bottom-up) would be superior to a regulatory approach (top-down).1 In addition, according to this view, there are sufficient incentives for trading platforms to publish equity post-trade data. The reason here is that the publication of post-trade data attracts liquidity (‘liquidity begets liquidity’)2 and the data can be sold as well.3

One can also take a different perspective. It can be argued that market forces alone are insufficient to ensure adequate equity post-trade transparency. A notable example is the case of liquidity providers. Liquidity providers will have little incentive to publish post-trade data about their recently concluded trades, since this increases their inventory risks. Regulatory intervention might therefore be necessary to ensure there is sufficient equity post-trade transparency. Whilst doing so, the regulation could take into account the inventory risks of liquidity providers through enabling delays in specified situations.4

There are valid arguments for both camps. It can be argued that reliance on market forces (i.e. bottom-up) or regulatory intervention (i.e. top-down) is necessary to establish the optimal degree of equity post-trade transparency (or a combination of both). It is ultimately a matter of market philosophy (i.e. market-shaping (top-down) versus market-facilitating (bottom-up)) what constitutes the ‘right’ approach.