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In this reprint from Global Trading, Cantor's Zhao describes the essential pillars of building a low-touch trading desk.

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March 1, 2014

Transparency Lies With Venues

Both regulators and market participants crave a new level of trust and transparency in the markets, and it's the job of trading venues to take a more active role in creating it before the regulators do.

By John Kelly

Who is responsible for transparency?

The growth of electronic trading has provided many benefits to equity investors by creating new market efficiencies and reducing trading costs. But it has also led to a complex web of venues, liquidity types and trading strategies that have contributed to a loss of confidence among investors globally. And while it may sometimes feel like "us vs. them," it is in the interest of institutional trading firms to work with regulators to restore confidence and clarity to our market structure. One place to start is transparency and control over liquidity interactions and use of customer information.

Since the earliest days of regulated markets, institutional investors have needed mechanisms to trade their large blocks away from the "open outcry" of the exchange floor. These institutions often trade in block sizes that still need to be matched away from the retail market so as not to cause price volatility.

With the digitization of markets, institutions now have a multitude of trading venues in which to trade. However, each of these venues caters to different, and sometimes contrasting, trading needs. And while some platforms serve their original intent of providing institutions with a venue to trade large blocks, most have become destinations for algorithms that slice blocks into pieces, indistinguishable from the trades found in the displayed world of the exchanges. The highly competitive, complex and interconnected market structure results in block orders being transformed into small orders that move quickly from one venue to another before eventually executing. This results in information leakage, adverse price movement and an erosion of fund performance.

Market fragmentation has also presented challenges to regulators in defining the types of transparency that are-or are not-beneficial to the overall market structure. It is difficult for regulators to implement "level playing field" rules common to all participants and venues while giving consideration to the large number, variety and codependency of trading venues. In such an environment, regulation could easily become a web of micromanaging rules that impede efficiency.

Institutional investors' need for market transparency is greatest, and the complexity of today's market structure itself has increased that need further. At the same time, it also poses greater difficulty as regulators and the industry work to define and standardize transparency across different business models.

Recently, we have seen some examples of regulators establishing sound principles that strike the right balance between individual participant protection and fostering broader market transparency and efficiency. One example is FINRA's proposal for new reporting standards for venue trading volumes that include an appropriate delay-two to four weeks, depending on the underlying liquidity available for a particular stock. Each venue is different. The operators of each trading venue are not only best placed to understand individual customer needs and how they interact with liquidity and the various trading technology solutions, but these venues also have a responsibility to their clients to communicate this. One way forward is for the venues to develop tools that give customers ultimate control over how markets are accessed and how their data is managed and used.

Still, the industry needs to do more. There needs to be an industrywide focus on protecting and respecting client information. Trading venues need to be responsible guardians of what is, essentially, proprietary information. They should have clear and transparent principles on how they interact with venues, liquidity and how their information is used. Importantly, they should give their clients complete control over these parameters through simple, user-friendly tools.


John Kelly is chief operating officer of Liquidnet.

The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community. Please send your comments to

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