18.III.3.1 Shift towards electronic trading

Within the financial markets a shift has been apparent from floor/telephone markets to electronic platforms, a trend that started in the EU/EEA from the 1980s.1 In a floor market (also ‘open outcry’) traders arrange their trades face-to-face on a trading floor, with some ‘crying out’ their bids and offers to attract other traders.2 Floor markets permit to see one another and interpret subtle cues like impatience and nervousness, as well as to voluntarily share information about clients. Similarly, in telephone markets interaction is possible between buy- and sell-side market participants, including the reasons for trading.3 Although floor and telephone markets can be seen as a way of improving pre-trade information (parties to transactions and their trading motives can become apparent), whether it improves overall pre-trade transparency depends on how many market participants are aware of the information.4 The information exchanged through floor/telephone markets will not by definition be apparent to all market participants willing to see such information.5

By contrast, a wide range of market participants can observe trading opportunities in electronic markets, especially since the arrival of the Internet. Another difference is that floor and telephone markets traditionally need more time to report post-trade data and it can take time to observe all pre-trade information from different telephone markets. Electronic markets are better able to disseminate pre- and post-trade prices and volumes in a quick fashion (i.e. faster price formation).6 Electronic markets are also more anonymous compared to floor and telephone markets, although it is possible to display investment firm identities or even the identity of parties to a (potential) transaction in pre- and post-trade information.7

Under the ISD, MiFID I, and MiFID II trading has overall taken place in an anonymous fashion, which is the effect of the anonymous nature of electronic trading combined with EU regulation.8 The identities of a party to (potential) transactions and/or the investment firm executing the order are not by definition apparent in pre- and post-trade data visible in electronic trading mechanisms. The situation is different in floor and/or telephone markets where at least the executing investment firm (broker) is known. Another effect of the shift to electronic trading is that EU/EEA pre- and post-trade data publication has become faster. Whereas the ISD used relatively late timespans, MiFID I required publication to take place in real-time (maximum of three minutes), which has been reduced under MiFID II (maximum of one minute).9 The deferral of post-trade transparency publication has over the years been shortened, in part due to technological innovation enabling investment firms to faster rebalance temporary risk positions. The EU believes that with technological developments, although controversial, trade publication could take place in a faster manner.10 All in all, technological development has from the ISD to MiFID II resulted in quicker and generally anonymous equity pre- and post-trade data.