FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
OMX
Markus Gerdien
President of Market Technology
A CLEAR VIEW OF GROWTH
In last’s years FEAS Handbook, almost all the
members spoke about growing their markets
as a target for the coming year. However,
nearly all surveys of exchanges targeting
growth show that the strategies for achieving
growth are as diverse as the markets
themselves.
There is one factor that regularly appears in
these discussions and that is the question of
transparency. Indeed a number of FEAS
members included increasing transparency as
one of the goals that they have set for their
organisations. Whilst easily discussed,
transparency is not always easily explained
and neither are the means for increasing it
easily implemented.
As a result, a brief discussion of some of the
issues surrounding transparency might prove
to be helpful in the context of the FEAS
community. As such we will present some of
the issues surrounding transparency as we
have encountered them and some information
about how technology can help in increasing
market transparency.
A Definition of Transparency
In the financial markets context, information is
at the heart of transparency. However it is not
just a question of transmitting everything to all
participants and hoping for the best. It is the
quality, timeliness and trust that participants
have in the information, as well as the
instruments (companies or products) to which
the information relates, that determines the
transparency of a market. In addition to
the transparency of information it is the
transparency of the market structure itself that
has an important bearing on the attitude of
the participants toward the market as a whole.
Transparency incorporates perceived and
actual risks facing participants in the market
since these risks will impact a participant’s
willingness to trade. For example, it is
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Modern trading systems can provide a diverse
range of market models, enabling exchanges
to make best use of market model
development to improve transparency and
facilitate growth.
possible that a market with full anonymity of
orders and a low level of settlement risk (say
a fully cleared market) can be more
transparent than a market where the identity
of the participants is known. This is because
in the former market, a participant entering
into a trade can be confident that the price
displayed in the system is the true price of the
deal in which they are about to engage. The
price is transparent. Increased Liquidity
Increased confidence in the reliability of a
given market, its transparency, will encourage
participants to enter orders into the system. In
a transparent market members will be willing
to enter orders that will stay in the order book,
increasing the depth of market information.
This allows the market to show the overall
interest in the market, not just the bid and
offer price.
Measuring Transparency
We have seen that there are a number of
factors that affect the transparency of a given
market. However, finding a direct, objective
metric for measuring transparency is difficult.
A number of metrics are correlated with
transparency, for example liquidity (as
measured by the tightness of the bid offer
spread for example) or settlement risk. Even
factors such as foreign investment provide a
measure of the confidence of participants in
the transparency of the market. But it is
difficult to evaluate these metrics across
markets. As a result, it is necessary to focus
on means by which we can improve individual
factors affecting transparency and make
comparisons within the market as these
changes have their affect on trading. The increase in liquidity brings a
commensurate tightening of the bid offer
spread, thus decreasing the “cost” of
execution by narrowing the gap that a
participant must cross in order to achieve
execution.
Increasing Transparency
We can look at a number of different
approaches to improve individual
transparency factors but for the purpose of
this article we will focus on the issues of
technology and market structure.
Transparent Benefits
We started this discussion with the premise
that growth is enhanced by transparency.
Whilst that is true there are some more
concrete benefits that derive from increased
transparency;
• Liquidity
• Cost Control
• Risk Management
Direct Control of Transaction Costs
In addition to the reduction in execution costs
from a tighter bid offer spread, a transparent
market allows a participant to understand the
true cost of execution. This because the cost
of information not only includes fees and
charges, but also makes the risk of settlement
failure, or the number of “fills” required to
complete a given order, transparent to the
participants.
Risk Management
One of the transaction costs that are more
clearly defined in a transparent market is the
impact of risk in the system. Whether it be a
fully cleared market or an OTC market with
clearly defined limits, the improved access to
risk information makes the true cost of a
transaction more readily determined. Indeed
the total amount of risk should be decreased,
since the factors affecting failure can be
reduced.