With new future trading challenges to address, such as crypto trading and ESG, operational resilience is set to dominate as a debate in 2022, according to a recent Liquidity Landscape report by Liquidnet, a wholesale electronic marketplace for equities and fixed income.
The EU launched a consultation in 2021 focused on the role of technology in finance and the growing reliance on third-party providers, sometimes based outside of the EU, for services including cloud computing, over which European regulators have little oversight.
The UK is also strengthening its operational resilience oversight, with the Bank of England publishing an announcement stating that firms must have identified and mapped “their important business services; set impact tolerances for these; and initiated a program of scenario testing” by 31 March 2022. They noted a significant increase in outsourcing, in particular to cloud providers, which requires appropriate oversight and risk management to be in place.
Given the continued focus by heads of trading on how to better integrate data and technology into execution processes, another area of note is ESMA’s latest consultation paper on Trading Venue parameters, which could have interesting ramifications for how technology is used to connect liquidity.
Any system which brings together buying and selling interests, even “bilateral interaction” such as RFQ, ESMA considers multilateral in nature and should therefore be registered as a trading venue, regardless of whether it is “using in-house facilities or by employing third-party systems.” Although ESMA notes that communication platforms which provide pricing data or other tools to make trading decisions is not sufficient to require the platform to be authorized as a trading venue, any communication platform that provides the ability to communicate “where the intention to enter into a transaction can be confirmed between the users of such platform” will qualify it as a multilateral system.
This includes EMS, unless the EMS in question merely supports the execution of orders on a trading venue and does not allow the interaction of multiple third party buying and selling interests. If the EMS “sends orders for execution directly to specific counterparties instead of trading venues,” it may “be considered multilateral in nature and hence in scope of trading venue authorization.”
Single Dealer Platforms come into scope “where the system operator brings together third-party interests, even with a single counterparty, and does not deal on own account, should be regarded as a multilateral system, and seek authorization as a trading venue.”
Pre-Arranged Trades (PAT) also come into scope: PAT “is only possible in a multilateral system without authorization as a trading venue when a) all transactions arranged through the investment firm’s system or facility have to be formalised on a trading venue; and b) the transaction benefits from a pre-trade transparency waiver on the trading venue where it will be formalised.”
Europe’s approach to shoring up trading venues is even more interesting when you take into consideration the Securities and Exchange Commission’s latest proposals to Form-ATS to make trading venues operate as ATSs, all of which is likely to have further ramifications on how technology will be used in the future and where liquidity will form.