Thomas in Blockland
Wednesday, February 22, 2017 by Steve Grob
Thomas the crossing network wasn’t happy. For years he had enjoyed helping his friends buy and sell things amongst themselves. Sometimes he would even step in directly and agree to buy or sell something himself, especially if there was an awful lot of it. But now he had a tricky choice to make.
The ruler of the land, The Regulator, had been convinced by the Exchanges that what he did was bad and so it had sent its messenger, known as MiFID 2, with a new directive. Basically Thomas could still help his friends, but only if he agreed not to play directly himself. He would also have to change his name to Dark MTF and wear a silly and ill-fitting cap that would stop him playing at all if he was too good at matching up buyers and sellers. The other alternative was even worse and meant that he could only buy and sell directly with his friends, but this would eat into all his hard earned pocket money (and, he would also have to change his name to Si).
Meanwhile things in Blockland weren’t looking too good either. For ages its inhabitants had always preferred to dine on large blocks but, more recently, the Algo Machines had starting crushing up their food for them. This was OK most of the time, but some of the machines were really annoying as they just ran around at high frequency leaving trails of crumbs for everyone else to try and follow.
Thomas was too busy trying to get his new cap to fit and so he wasn’t much help, and it was left to the Exchanges to step in with a new idea. This approach made sense and was based on allowing people to fill out a slip saying what they would be prepared to trade if they could. Unfortunately though, the Exchanges provided people with three different places to send their slips to. And so no one knew if they were supposed to pick just one and hope they got lucky or write out three slips, post them all and risk getting overfed. The Algo Machines sensed another opportunity and began to ponder.
“Never mind”, said The Regulator. “Why don’t we all sit down and discuss this over a game of unintended consequences”…
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.