Jeremy Smart, global head of distribution at XTX Markets, addressed some of the key drivers which are changing the market’s approach to liquidity sourcing in Europe, suggesting that there exists a “permanent misunderstanding” between transparency and efficiency across the market.
Simon Dove
“When people talk about transparency, they talk about transparency as if it is one single thing, but transparency of price discovery is actually different to transparency of liquidity discovery. They are two different elements.”
Read more – Dark trading: navigating a post-Brexit divergent world
Sam Railton, managing director, business management, EMEA at Tower Research Capital Europe, explained that he sees price formation as a spectrum, one which is increasing as fragmentation continues to develop.
“On the one end you’ve got pre-trade transparent and on the other hand, you’ve got some trading that’s happening in Europe that doesn’t even print at all. You’ve got brokers trading swaps against each other and the volume just disappears […] At some point, you do have to question what the impact on price is going to be.”
Chris Jackson, head of equities, EMEA at Liquidnet also spoke to this point, using dark trading as an example as to how best execution rules are arguably not serving the market in the best possible way when it comes to liquidity sourcing.
“It is a misunderstanding to say that just because it’s transparent, it’s good. I think dark creates a concept of fair value and I think we have to take a better look at that.
“The problem that we need to solve here as a market is that the buyers cannot find sellers and sellers cannot find buyers […] it’s that balance between liquidity discovery and price discovery that we have to innovate around.”
Elsewhere, other panellists – Simon Dove, managing director and head of liquidity, EMRA at Instinet and Brian Gallagher, head of EMEA cash execution at BNP Paribas – gave their view from the broker perspective.
On the dark trading topic, Dove made clear that he believes there aren’t concerns across the market per se, but instead a lack of all-round understanding. Dark trading, though currently experiencing significant change and sparking key conversations, has for a long time been part of the essential make-up of the trading world.
Despite this, Dove explained that the industry need to understand the fundamentals of what happens within the periodic, asserting that this is where the true crux of much of this is.
“I feel it’s actually bilateral. We just need to understand the actual workflow […] From our perspective when it comes to innovation within our own platforms and our own technology it’s about understanding the clients need and actually one size does not fit all.”
Ultimately, whether lit dark or other, choice is paramount, but efficacy must be maintained, added Dove.
Gallagher further added that a key consideration is for everyone to know where each player stands and the context behind the numbers. When it comes to market development, he suggested that innovation is not a part of the problem and that instead it’s how the parts fit together.
“I think from a brokerage perspective, you must remember that we’re part of an ecosystem […] for the buy-side it’s part of their work to experiment and understand the interaction that they have, there is this notion that the exchange volumes are unattractive or the most toxic but still we all ride off the price of the exchange. We all look to that as a reference price.”
Gallagher went on to add that aligning trading hours could be an effective way to do this as market players look to limit the challenges around the distribution of liquidity when it comes to certain times of the trading day.