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CWM Financial Markets > Chapter 8 - Alternative Trading Venues > Flashcards

Chapter 8 - Alternative Trading Venues Flashcards

1
Q

What is the first US example of an alternative trading venue?

When was it launched?

A

“Electronic Communication Networks” (ECNs)

Launched by the SEC in 1998

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2
Q

What was the original purpose of an ECN?

A

Create more competition between trading firms by lowering costs

Offer order matching outside of traditional hours

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3
Q

Why is the term “trading venue” confusing

A

Despite being called a venue they have no actual physical location

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4
Q

What did the original MiFID aim to do?

A

1) Harmonise Markets
2) Increase Transparency
3) Better Price Discovery
4) Verify brokers are following best execution rules

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5
Q

What did MiFID II add?

A

1) Controls to prevent market abuse
2) Improve transparency further
3) Increase scope beyond equities (ETFs, bonds, ADRs etc)

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6
Q

What is an MTF?

A

A multilateral trading facility

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7
Q

What does an MTF do?

A

Offers an alternative trading venue to formal exchanges which brings together buyers and sellers.

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8
Q

Who can use MTFs?

A

Retail and Institutional Clients

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9
Q

What can be traded on MTFs?

A

Shares, Bonds Derivatives + More

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10
Q

How does MiFID II regulate MTFs?

A

Same as regulated markets

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11
Q

What must be in place in MTFs and what must they ensure?

A
  • “system and controls” to ensure “performance is adequate, effective and appropriate
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12
Q

What must MTF operators ensure they avoid?

A

Conflicts of interest

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13
Q

How is transparency ensured on MTFs?

A

Pre and post trade requirements

(buyer and seller pre)
(seller post)

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14
Q

What basis are MTFs ran on?

A

“non-discretionary”

Cannot interact with parties contract

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15
Q

How is fairness ensured in MTFs?

A

A set of clear transparent rules for all parties

These rules set the basis for the “non-discretionary” basis to work.

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16
Q

What are the 3 benefits of MTFs?

A

1) Non discretionary - no special treatment for firms
2) Transparent pricing (pre/post reporting)
3) MiFID Compliant

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17
Q

What is an OTF?

A

Organised trading facility

18
Q

How does an OTF differ from an MTF?

A

OTF:
- Can be discretionary
- Cannot trade equities

19
Q

What is the advantage of OTFs?

A

1) Provide liqudiity and price discovery to illiquid assets and markets
2) OTFs must monitor members under their transparent rules

20
Q

What is a systematic internaliser?

A

A financial institution which exectures its clients orders on its own account

21
Q

When does a FIG qualify as a SI?

A

Taking ordres on a:
1) Frequent
2) Systematic
3) Substantial Basis

dependant on the security and its liquidity,

22
Q

If considered a systematic internalizer what must be done?

A

Firm must adhere to the pre and post trade transparency as MTFs and OTFs

You are considered an exchange if deemed to be a si

23
Q

What is a dark pool?

A

A forum to trade securities in a non-displayed nature

Size, direction and identity and not displayed

24
Q

What is the motivation behind dark pools?

Who uses them most commonly?

A

Do not want to indicate position / stratergy to the market.

Large financial institutions (particuarly hedge funds)

Hedge funds want stratergy to remain secret.

Prevents front running

25
Q

How much of trading volume do dark pools make up in:

1) UK
2) US

A

1) 9%
2) 18%

26
Q

What are criticisms of Dark pools?

A

No longer reflect price of securities

Playing field isn’t level for smaller investors

27
Q

What has the SEC done to address dark pool criticisms

A

Launched biggest trading rule overhauls - aim is to level the playing field

announced 2022 - undergoing implementation

28
Q

What are the three types of Dark Pool

A

1) Broker-Dealer owned
2) Exchange Owned
3) Electronic Market Makers

29
Q

What is a broker-dealer-owned dark pool?

A

Set up by broker-dealers: (usually IBs)

Own traders as well as clients use them

30
Q

What is an exchange owned dark pool?

A

Ran by an exchange - act as agents and not principals

31
Q

What is an Electronic Market Maker Dark Pool?

A

Independant dark pools - usually offer lower transaction costs (can operate as principals)

32
Q

How are assets priced on Dark Pools?

A

Mid Point

Spreads differ from public exchanges

33
Q

Give 4 Advantages of Dark Pools

A

1) Annonymity for Firms
2) Large deals have reduced effect on the market
3) Trades can have cheaper fees
4) No indication of strategy / direction - prevents front running

34
Q

Give 5 disadvantages of dark pools?

A

1) Actual prce not available on market
2) Cannot determine if trade done at “best price”
3) HFTs can unearth large orders to arbitrage
4) Actual size of trades small - on average 200 shares

35
Q

Give two ways in which dark pools differ from traditional markets

Broadstrokes, they operate very similarly

A

1) Liquidity is hidden (no need for iceberg orders)
2) Do not need to provide data to markets

36
Q

What is the impact on markets of dark pools?

A

1) reduction in impact of large trades
2) Financing for dark pools is taken from major markets (reduces their liquidity)
3) Hard to value assets under true and fair accounting

37
Q

Give two controversies surrounding Dark Pools

A

1) Lack of regulation
2) HFTs can use predatory practices to front run

38
Q

How has the US regulated dark pools?

A

SEC & FINRA made more information from dark pools available to public

Fined banks for misleading practices

39
Q

How has the EU regulated dark pools?

A

Certain names barred from being traded on dark pools

4% of trading in a single stock per dark pool
8% across all dark pools

once cap is reached, trading on dark pool is prohibited

40
Q

What is a ping pool?

A

Same as a dark pool but:
- Single counterparty
- Brokers can enquire as to who is involved
- Transparency & regulation is more opaque

Less transparency - causes concern for some participants

CWM Financial Markets (58 decks)

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