Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, October 02, 2008

Price discovery has never more important – or more difficult - than now.

It has been a simple thing for regulators – and politicians – to demonise traders and short sellers in le crunch. However one important facet for IR people has been the impact of MTF’s.

From Turquoise, BATS Trading and Equiduct as new entrants, to the more established Chi-X and PEX, these platforms mostly owned by banks or consortia of brokers, offer low cost transaction costs compared to the big exchanges - traditional trading venues. This competition has been created through the European Directive MiFID. Meanwhile in the US, the model is well established: there are about 40 alternative trading platforms, including operators of "the dark pools of liquidity".

Dark pools are private interbank or intrabank platforms that are widely used to trade stocks away from exchanges. They are used by clients such as hedge funds to buy and sell large blocks of shares in anonymity, avoiding the risk of moving the public price of a stock on an exchange as a result of copycatting by other traders. Some believe that as much as 12% of US daily volume is traded in this way. And Europe hasn’t even got started yet…

This absence of transparency is of concern at ANY time; but in today’s turbulence it is potentially very damaging. Investors wanting to avoid moving the public price of a stock may well be damaging that public price. The argument goes that if so much activity is hidden, how can the price quoted on the public markets be truly indicative of the investor interest or sentiment on a particular stock?

And so far this absence of transparency has been focussed on direct equities. Imagine when you add derivatives to the mix; even that limited view provided by “guesswork” on the background to a prop desk trade will disappear.

So far regulators have failed to act to shine a light. Meanwhile, empathy please for the IRO’s as they seek to keep track of intra day movements – as their day job requires.


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