[ I N T E R V I E W
|
J A M E S
B A U G H ]
“The concern is that
the market has become
more fragmented
and complex, and
invariably, with that
costs increase, which is
always going to be an
issue.”
sea change in the near future, but
there are some fairly significant
developments that we may see and
have to be ready for. One is the
impact of the public tick regime on
both lit venues, more specifically
periodic auctions, and on SIs. As
we understand it, towards the
end of this year or early next year,
SIs are going to have to adhere to
the public tick regime in all sizes,
which means SIs will be signifi-
cantly limited in their ability to
price improve unless that busi-
ness is above large-in-scale LIS,
Similarly, if you are no longer able
to match mid-price in periodic
auctions, and given the majority of
business is done below LIS using
peg-to-mid-order-types, we have
to start thinking about the impact
this might have on the liquidity
landscape and how to get that type
of business executed.
The frustration for the market
is that this is not just focusing on
mid-price or price improvement
per se, this is more about being
able to match intra-tick where
there are an odd number of ticks in
the spread, so you can still match
at mid-price but only if there is
an even number in the spread. It
does seem a little bit nonsensical
trying to implement these sorts of
changes that could have a fairly
significant impact in being able to
trade at fair value.
Thinking about the SIs, we think
the LPs may suffer if they are not
able to offer price improvement
unless they evolve their models.
For bank SIs it is slightly different
because price improvement itself is
not the determining factor in terms
of how we get business done, but it
is going to lead to certain changes
to the liquidity dynamics that we
need to cater for. That is something
we need to think about in the rela-
tively near term.
The other area of interest is
around the market-on-close
business, where we have seen
liquidity very much concentrated
on the close. The numbers will tell
you that some of the more liquid
names, not just on LSE but on oth-
er primary markets, see 30%-35%
of the daily volume traded on the
close. We are now engaged with a
number of alternative platforms
which are looking at ways in
which they can provide solutions
or ways to get that market-on-
close business done away from the
primary. Again, this could see some
structural changes in the relatively
short term. However, as an indus-
try we need to be thoughtful about
how we approach this, because
what you invariably end up doing
here is diluting the actual reference
price itself. It’s also worth noting
that a number of institutions are
also looking at benchmarking away
from the close which in in itself
is an interesting move and one to
watch.
Issue 60 // TheTradeNews.com // 61