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Three things learned in Reykjavik

Last week our Executive Chairman, Kevin Houstoun, was invited to participate in “The Regulation and Operation of Modern Financial Markets”conference, hosted by the University of Iceland in Reykjavik. Held in cooperation with the London School of Economic Systemic Risk Center, where Kevin is a research associate, the event brought together leading academics, regulators and central bankers to assess how far we’ve come in the decade since the global financial crisis. 

In the context of a post MiFID landscape and cross-asset growth in electronic trading, the conference examined the current status and outlook for market structure and microstructure, liquidity, the impact of speed on stability and investing, and critically, systemic risk and contagion effects in financial markets.

Going beyond the daily headlines of the financial press, these events enable a detailed review of some of the more cutting edge academic research and often throw up some interesting analysis, such as the following three unexpected insights;

  1. Research suggests that large trades achieve better execution in lit markets than in dark pools, and that revealing their urgency improves their execution quality!
  2. A paper demonstrating a strong link between intra-day tick data and a predictive element for investment performance up to 400 days into the future.
  3. An analysis of the impact of double volume caps on dark pools that implies that when these levels are breached the liquidity does not revert to lit markets, as was the regulation’s intention, but is actually shifting to other off-exchange execution venues.

More generally, recent market evolution has seen the growing popularity and importance of the closing auction and increasing electronification across asset classes contributing to improved transparency. However, underlying systemic risk due to the shift to central clearing models continues to raise concerns, while Kevin spoke of the ongoing lack of coordination between industry standards as another issue that seems unnecessarily slow to resolve.

Looking forward, a discussion assessing market designs enhancements argued for a focus on price over speed through the implemention of periodic auctions during the trading day. While a panel looking at the future of market microstructure design concluded that despite all the swathes of regulation since the global financial crisis and subsequent changes to market structure, ongoing changes are the new norm.

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