Buy-Side Concerns: Liquidity, Transparency

Terry Flanagan

Market structure issues are percolating to the surface, with potentially far-reaching impacts on dark pools, order routing disclosures, and market making.

Regarding dark pools, the U.S. Securities and Exchange Commission has stated on numerous occasions that’s it’s considering a trade-at rule, similar to that which exists in Canada, that could in theory place dark pools at a competitive disadvantage to lit exchanges.

“Specific to the U.S., I think there’s a lot of talk around dark pools and how the exchanges are looking to bring forth any type of regulation to bring back some of the liquidity back to the lit exchanges,” Sabrina Gagliotta, global head of trade execution and consulting at Bloomberg Tradebook, told Markets Media. “There’s definitely concerns around how there’s global regulation that could have impact in the U.S. as well. So any decisions that come out of MiFID II for example, have a trickle-down impact into the U.S.”

In a Sept. 12 comment letter, investment giant BlackRock downplayed the importance of a trade-at rule, but said that ATS operators should be subject to more rigorous disclosures in Form ATS filings.

“Mandatory ATS disclosures should include greater detail on how the platform calculates reference prices, determines order priority, matches orders between client segments, monitors execution quality, advertises orders, interacts with affiliates and is compensated by subscribers,” according to BlackRock.

Tradebook has created an ATS Disclosure Document that it says goes beyond Form ATS in explaining how the Tradebook System handles orders. “We believe that communicating how our system is built, what our matching priority logic is, and how our smart order routing decisions are made can only improve the trust clients have in us and our product offering,” said Gagliotta.

Sabrina Gagliotta, Bloomberg Tradebook

Sabrina Gagliotta, Bloomberg Tradebook

Bloomberg Tradebook has launched an electronic Request for Quote (RFQ) service for exchange-traded funds (ETFs) that enables traders to anonymously access liquidity from buy-side ETF providers in the U.S. and Europe.

The Bloomberg Tradebook RFQ platform enables investors to find block liquidity in more than 1,500 ETF products, including specialized or smaller ETF securities, electronically and anonymously, from buy-side firms who are increasingly serving as sources of liquidity in the $2.6 trillion global ETF market place, the company said in a release.

“In the building out of this product offering, clients expressed their challenges in trying to extract liquidity, given that there wasn’t any one solution that brought together on and off exchange in an aggregated fashion,” said Gagliotta. “What we’ve done is brought together buy-side market makers and have pooled together on and off exchange liquidity in an electronic fashion. We offer transparency in order routing decisions, as well as analytics that helps the client make decisions at the pre-trade level as well as analyze the executions post trade.”

Bloomberg in 2013 held a workshop with members of equity buy side trading desks from 37 asset managers who represent over $10.6 trillion of assets under management, in which participants expressed their desire and need for additional transparency on the handling of equity orders.

Most buy side firms now send out questionnaires to their brokers seeking additional information/transparency on order handling and internalization (dark pool) matching protocols in order to understand what exactly happens to their order once they choose to use a broker’s algorithm and/or SOR.

In an Oct. 16 blog post, Gagliotta wrote, “The buy side is looking to understand what decisions a broker makes on their behalf and for what reasons. SEC help is needed because the buy side are not members of the national exchanges and may not be customers of all the ATSs that their brokers interact with and, thus, are not able to fully assess order interaction that occurs across the market structure.”

Featured image via Romolo Tavani/Dollar Photo Club

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