What’s the best way for Europe and the UK to get a full picture of liquidity?
Investors can get information about the liquidity of European stocks into market data systems, but they will find different ways to measure this liquidity and customise composite codes for the calculation of average daily trading volume (ADTV).
The measurement of ADTV is quite challenging for European stocks. If you ask five brokers for the ADTV of a European stock, you will likely get five different answers. Average daily volume also means different things for different types of equity traders (low touch and high touch traders). Low touch traders take a more restrictive view of ADTV based on addressable liquidity – in the strict meaning of ‘addressability’ – while high touch traders have a broader approach to ADTV based on broader liquidity, and this broad liquidity includes off book on-exchange and SI volumes.
For example, if a natural block is crossed by an agency broker on behalf of two equity investors, this block trade will be reported as off book on-exchange and this information will be important for high touch traders to measure liquidity. That is the reason why equity investors need a consolidated tape in Europe, to access consistent post-trade data where everyone would be on the same page, at a reasonable cost.
Is there an ideal way for the industry to report ‘hidden’ liquidity and how’s the internalised flow being reported?
If you look at SIs you will find a broad spectrum of investment firms (bank SIs, non-bank SIs or electronic liquidity providers) that have different objectives and offer different types of liquidity. SIs offer execution and, more precisely, immediacy of execution, against their own capital.
They are only accessible on a bilateral basis, and they complement the limit order books operated by trading venues for European stocks. All SI trades are reported, but large SI trades benefit from delayed publication to minimise noise in the market, thus ensuring a delicate balance between transparency and liquidity.
How could the consolidated tape play a part in how things develop?
As I mentioned, investors need a consolidated tape for European stocks at a reasonable cost, so that everyone would be able to access consistent post-trade data. The consolidated tape will improve post-trade transparency across European equities, but post-trade transparency must be well calibrated regarding SI trades.
The CT will also provide pre-trade data in real-time. Whatever pre-trade format the new consolidated system would take for equities in Europe, it’s important to remind ourselves, in this context, that the CT should be a viable commercial proposition for all stakeholders, and an affordable solution for equity investors.