EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/6.IV:6.IV Different data needs

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/6.IV

6.IV Different data needs

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266553:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

The previous paragraph examined different types of post-trade data. The availability of different types of post-trade data depends on several factors. Two main factors include: (1) the needs of the data users and (2) inventory risk. Post-trade data can be used for a lot of different purposes. Examples include making trading decisions (seeing at what terms trades are actually concluded) and monitoring the effectiveness of a trading strategy (best execution). The importance of the different variables of post-trade information varies per data user.1 For example, whilst delayed post-trade data may be sufficient for an investment firm in monitoring the effectiveness of the best execution-process,2 real-time (and perhaps even low latency) post-trade data might be required in deciding where and when to trade.3

Inventory risk is also of importance for the variables of post-trade information. An ‘inventory’ refers to the positions that so-called ‘liquidity providers’4 take in financial instruments by trading on own account (whether or not through internalisation). Liquidity providers must control their inventories in order to trade profitably. Large positions expose liquidity providers to serious losses if prices move against them. This risk is referred to as ‘inventory risk’.5 Liquidity providers accordingly aim to reduce inventory risk. One way of reducing inventory risk is by delaying the publication of post-trade data (also referred to as ‘deferral’). The delay in post-trade data publication permits the liquidity provider to rebalance its position (‘unwinding the position’) without letting the broader market know about the recently concluded trade. The result could be enhanced liquidity from liquidity providers.6 That being said, delayed post-trade information also entails risks. With delayed post-trade data publication, the liquidity provider will have an information advantage over other investors (information asymmetry) and the price discovery process will not be up-to-date.7

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Securities Markets Stakeholders Group (SMSG), Advice to ESMA: Data Publication, 23 September 2014 (ESMA/2014/SMSG/042), p. 2-3.

Copenhagen Economics, Regulating access to and pricing of equity market data, September 2013, p. 18.

Copenhagen Economics, Regulating access to and pricing of equity market data, September 2013, p. 17. For example, so-called high frequency traders might want to exploit arbitrage possibilities, being price differences in the same financial instrument as traded on different trading platforms. High frequency traders specializing in arbitrage require facilities, such as co-location, to ensure the lowest latency possible. See, for example, Business Standard (M. Shah), ‘Arbitrage traders go high-tech with co-location facilities’, 21 January 2013 (available at: https://www.business-standard.com/article/markets/arbitrage-traders-go-high-tech-with-co-location-facilities-110091300094_1.html).

A ‘liquidity provider’ is a person that generates revenue intra-day by taking both buying and selling positions in financial instruments with the aim of earning from the spread (i.e. the difference between the bid and offer price in a financial instrument) (L. van Setten, The Law of Institutional Investment Management, Oxford, 2009, p. 256).

L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. p. 284. The inventory risk can be divided in (1) diversifiable inventory risk and (2) adverse selection risk. Diversifiable inventory risk is due to events that cause price changes no one can predict. Adverse selection risk is when liquidity providers trade with informed traders (ibid, p. 285-286).

CEPS, MiFID 2.0: Casting New Light on Europe’s Capital Markets, 2011, p. 71.

International standard setter IOSCO noted for this reason that ‘(r)egulators need to assess the appropriate level of (post-trade) transparency in any particular market with considerable care’ (IOSCO, Market Transparency and Fragmentation, 2001, p. 4).