How Exchanges Work: Trading Venues, Algorithmic and High-Frequency Transactions
The chapter investigates the functioning of exchanges. First, it discusses the features of different types of trading venues: for instance, the role of newly-introduced OTFs. Then, it debates the role of technology underlying transactions, which is increa
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How Exchanges Work: Trading Venues, Algorithmic and High-Frequency Transactions
Abstract The chapter investigates the functioning of exchanges. First, it discusses the features of different types of trading venues: for instance, the role of newlyintroduced OTFs. Then, it debates the role of technology underlying transactions, which is increasingly shifting towards algorithmic (AT) and high-frequency (HFT) solutions, widely regarded by the EU legislator as a potential threat to systemic stability. To provide a deeper understanding of what an automated exchange means, the chapter briefly covers the divide between ‘electronic communication networks’ (ECNs) and ‘market makers’ in the US jurisdiction, which presents a concerning trade-off under multiple aspects (e.g., efficiency vs. transparency). In addition to merely economic aspects, the most salient regulatory tasks are also investigated: inter alia, the platforms being required to ‘self-assess’ themselves—and, specifically, their recourse to AT and HFT techniques—by means of a stress test, aimed at identifying and mitigating systemic threats. Finally, we devote some attention to the so-called ‘SME growth markets’, i.e. a type of MTF specifically designed to trade equities representing small and medium-sized enterprises, for the purpose of sustaining their development.
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Trading Venues as a Critical Issue
Before detailing the organisational and supervisory novelties brought by the Package, it is worth highlighting the relevance of trading venues for an orderly and efficient development of markets. Moloney (2014) defines them as a critical component of financial market infrastructure, for they play a number of pivotal roles: permit a mobilisation and allocation of savings towards financial investments, favour liquidity of traded instruments, allow for better trading activity and risk management. Hence, in light of the financial intermediation theory, trading venues are essential in allowing the transfer of monetary resources from the subjects in surplus to those in deficit. This clearly explains why their regulation is at least as important as that on securities.
© Springer Nature Switzerland AG 2019 M. Comana et al., The MiFID II Framework, https://doi.org/10.1007/978-3-030-12504-2_4
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4 How Exchanges Work: Trading Venues …
Years before the GFC, trading venues had already experienced disruptive changes affecting their nature and functioning. In general, they had evolved from being “neutral” platforms, designed to merely support and offset the ongoing transactions, to represent perhaps the greatest sources of information and data provision in the financial realm. This has occurred not only because of the increasing ‘depth’ of markets—certainly driven by technological progress and economic advancement—but, also, thanks to some structural features which have risen in most recent years (Moloney 2014): risk-management products are more standardised; admission to listing and secondary-market trading functions have been separated; the degree of competition has undoub
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