Posibles escenarios de ataques ciberterroristas

Exposure risks and market depth (as above) may require the use of liquidity non pre-trade transparent (dark liquidity)63_{. In general, all trades are important} for price formation as they form liquidity, even if they are not displayed. Dark liquidity – below a still unclear market share – may bring some beneficial effects to the whole market. Recent findings on hidden orders show that some opacity in the market improves liquidity in a centralised limit order book with no fragmentation (Moinas, 2010). It can be justified by the strong incentive for informed traders to sniff out where hidden liquidity sits on the lit book (De Winne & D’Hondt, 2007). Hidden orders stimulate informed traders to search for liquidity. In addition, if you expose those orders you may generate the effect of withdrawing liquidity from the market, so making it more subject to manipulation because much lower thickness and depth (‘thinner’). The presence of hidden orders, therefore, stimulates greater activity for liquidity demanders in order to find trading opportunities within the book. This is a major difference with stand-alone dark pools, which do not have direct liquidity links with the lit book (they do not hit the displayed limit order book).

Setting the scene

Why traders engage in dark trading has been already implicitly or explicitly mentioned, but the IOSCO (2010c) has recently listed the reasons in a consultation paper. They can be summarised as:

1) Avoiding private (or proprietary trading) information leakage;

2) Minimising market impact costs (information leakage and/or insufficient market depth);

3) Ensuring better order management (risks of being ‘picked-off’);

4) Avoiding also hidden orders as they may be sniffed out by sophisticated software;

5) Taking advantage of a price improvement; and 6) Minimising transaction costs.

Purposes

Size of non-pre-trade transparent liquidity is constantly growing across Europe (see Table 3) and currently represents 6.76% of total EEA trading (off and on-order book; see Table 4) and 10.86% of EEA trading on RMs, MTFs and Broker-dealer Crossing Systems (BCSs).

Size

Table 4. Dark liquidity in the EU (% of total EEA trading)*

2009 2010

Q1 Q2 Q3 Q4 Q1

Dark Pools and

Hidden Orders** 4.71% 5.68% 5.6% 6.11% 5.26%^

Broker-dealer

Crossing Systems 0.9% 0.9% 0.9% 1.4% 1.5%

5.61% 6.58% 6.5% 7.51% 6.76%

*Trading under waivers, % of EEA total trading. ^It does not include Poland.

**Estimated market shares as % of EEA total trading, assuming a constant average market share of OTC trading of 38% in 2009 and Q1 2010 (CESR 2010b).

Source: Authors’ calculation from CESR (2010b).

Table 5. Dark liquidity in the EU (% of EEA RMs, MTFs and BCNs trading)*

2009 2010

Q1 Q2 Q3 Q4 Q1

Dark Pools and

Hidden Orders 7.6% 9.2% 9.0% 9.8% 8.5%^

Broker-dealer Crossing

Systems** 1.43% 1.43% 1.43% 2.21% 2.36%

9.03% 10.63% 10.43% 12.01% 10.86% * Trading under waivers, % of total EEA trading on RMs and MTFs. ^It does not include Poland.

** Estimated market shares as % of total EEA trading on RMs, MTFs and BCNs, assuming a constant average market share of OTC trading of 38% over time (CESR 2010b).

Source: Authors’ calculation from CESR (2010b).

Different views emerge on where dark liquidity might be concentrated. Some authors argue that stocks with high volumes, high market depth and low volatility are mainly traded ‘dark’ (Degryse, et al., 2008; Buti et al., 2010b). Others (Ready, 2009) suggest that dark liquidity trading would be converging on stocks with high spread, in order to find a better deal on other venues. In effect, the idea is that – although high liquid shares may receive easy execution on dark pools – liquid shares will receive low execution costs on other venues as well, so the opportunity costs of trading on lit pools is very small. There are few incentives to look to other venues. With large spreads on lit books, instead, traders may search for other venues giving price improvements (Cheuvreux, 2010). In the EU, this should be even truer as traders get at least the mid-point (but also a Volume Weighted Average Price, VWAP)64 _{from dark pools}

Externalities

applying the reference price waiver,65 _{while lit trading venues may offer very} high bid/ask spreads on that specific product. Ready (2009) also suggests that institutional investors with big average positions and less turnover make more use of dark liquidity, in line with the theoretical framework.

Dark liquidity may also generate negative externalities, in terms of liquidity fragmentation and order migration. In effect, adding a dark pool to a liquid market with OLOBs may lead orders to migrate towards this new pool (‘cream skimming’), which stimulates the arrival of new orders (with liquidity- externality effects). The new environment seems to benefit institutional investors, but it may decrease the price discovery ability of retail ones, as they will not be able to see a part of the market (less efficient price discovery, Buti et al., 2010a). Authors find that overall the total welfare increases, but the distributional effects remain. Moreover, the abovementioned studies – even though with limited evidence – seem to convene that an excessive volume of dark liquidity may generate negative effects and market operators would not have incentives to reduce those effects once materialised. In effect, high network externalities and effects on revenues may push players to act as in a prisoner’s dilemma (bad equilibrium). There may be no incentive to cooperate when a damaging threshold is reached, even though the final outcome may not benefit any of the pools in the market. Therefore, regulators may need to monitor when the size of these liquidity pools is actually deteriorating market quality (mainly price formation and discovery processes).

In order to increase the market quality of the liquidity pool, dark trading venues (dark MTFs/RMs) may adopt a non-binding indication of interests (IoIs) messaging system. This system is typically designed to attract liquidity, through giving access to privileged private information on trading interests, including size, price (or a targeted weighted average price), buy or sell, and often the symbol of the security. IoIs are typically sent to some traders on a discriminatory basis. Therefore, those investors may benefit from the network of dark pools without competing for liquidity with other traders.

Some market operators argue that this might be an elegant way to circumvent the public pre-trade disclosure of quotes, discriminating potential investors who might be interested. At the same time, disclosure of IoIs does not bind the counterparty to conclude the trade. On the one hand, a non-binding IoIs messaging system may increase legal uncertainty by stimulating expectations (inefficient commitment) about the stipulation of the contract (trade). On the other hand, MiFID recognises the importance of non- discriminatory access to order information on trading venues (RMs/MTFs) in addition to the overarching objective for organised trading venues (as defined by CESR, 2010g) to comply with pre-trade transparency requirements. Therefore, CESR (2010b) considers the provision of private valuable order information on a discriminatory basis as a violation of MiFID principles (unfair), in line with the SEC (2009). However, the Committee did recognise the role of IoIs in the OTC trading if finalised to find selected counterparties to a large order waiting for execution. This practice was already widely in use before the implementation of MiFID.

IoIs

Dark liquidity can sit on official trading venues, both MiFID-compliant OTC trading

and over-the counter. MiFID recognises the importance of OTC trading (Recital 5366_{) as part of the general freedom of investors (shareholders) and legal} entities to trade shares privately – if specific circumstances are met. It also acknowledges that OTC trading can promote the smooth operation of financial markets by providing in some instances better investment services outside MiFID official venues. There are conflicting views on the actual size of OTC trading (in terms of price forming trading), which the report will consider in the next sections.67 _{CESR estimated OTC trading as 38% of trading in the EEA.} However, as CESR itself stated (2010b, p. 35), this data may be inflated by double counting and misreporting, hence lack of quality and accuracy urges actions to reduce inconsistencies and increase granularity.