Plato’s inaugural 60 second read coincides with the launch of MI3’s maiden conference and the publishing of Carole Comerton-Forde’s evaluation of dark trading in Europe and beyond. Here we give an exclusive insight into her thoughts on the subject and what the impact of MiFID II is likely to be.
60 Second Read: Carole Comerton-Forde, Professor of Finance at the University of Melbourne
1. As an independent observer, what are your thoughts on the Plato Partnership project and their aims more generally?
I’m a big believer in evidence-based decision making, and market-led, rather than regulatory-driven, solutions for market structure. So it is exciting to see Plato Partnership is seeking to do both. They are engaging with academics to understand what can be learnt from existing academic work, and commissioning work to fill in the gaps where the understanding of markets is incomplete. The collaboration between the buy- and the sell-side is also an important component.
2. How did you first hear about Plato Partnership’s Market Innovator (MI3) and what were your motivations for getting involved?
I was on sabbatical at the London School of Economics in late 2014 when the Plato Partnership was first announced. At that time I met some of the consortium members at a conference – and have continued a dialogue with them since then. As a market structure researcher, I am always keen to engage with the industry to ensure my research is relevant. So an initiative like Plato’s MI3 is of great interest. One area of focus for me is dark trading – so there is a natural fit between my work and the development of Turquoise Plato Block Discovery.
3. What role do you think academia can play in the development of global market structure?
Academic research has a very important role to play in market structure development. I think academics and the industry can do more to find ways to collaborate better. Academic research is often constrained by access to high-quality data, while industry and regulators are often unable to devote sufficient resources to rigorous research. By working together more, both groups can achieve better outcomes. This collaboration should help improve market structure.
I have been an economic consultant for the Australian Securities and Investments Commission (ASIC) for a number of years – first helping with the development of the rules framework for competition in equities trading, and then subsequently on issues related to dark trading and high frequency trading. In developing the rules framework, ASIC carefully considered the developments in other parts of the world, and decisions were informed by the academic evidence on the benefits and costs of some of these developments. Although my involvement makes me somewhat biased, I think the Australian equities market is in pretty good shape as a result of this evidence-based approach.
4. In your view, how do the volume caps introduced under MiFID II compare to the volume caps implemented in other markets (such as Australia, Canada and the US)?
The Canadian and Australian regulators introduced a price improvement requirement for dark trades in 2012 and 2013, respectively. These rules mean that small trades in the dark, can only occur at prices better than the best displayed price. This requirement intentionally gives priority to lit trades over dark.
These rules dramatically reduced the level of dark trading in Australia and Canada, but did not have a substantial impact on market quality. With MiFID II, European markets will also be subject to similar price improvement requirements as reference price trades will only be allowed at the midpoint prices.
The volume caps are an additional restriction, which will be much more problematic. In stocks where the cap is breached, and dark trading will be banned which will cause significant disruption to trading. Current evidence suggests that the caps will be breached in large numbers of stocks. This will force traders to find new ways to source liquidity.
5. You state that the buy and sell side will need to collaborate on adjusting operating practices when dark trading is shut down in certain stocks – how do you expect this to play out in reality and what format will said collaboration likely take?
Turquoise Plato Block Discovery is a really good example of collaboration between the buy-side, sell-side and an exchange group. They have created a market structure that caters to the needs of members wanting to source dark and block liquidity. I expect there will need to be more collaboration to build trade analytics tools which can help to inform trading strategies and algo developments.