The FCA has published a speech given by David Lawton, FCA Director of Markets. The speech is entitled Price: the cornerstone of markets.
In his speech, Mr Lawton discusses the integrity of the price formation process. He mentions that when any markets regulator is asked how the markets are performing, they will usually assess the markets and themselves against a key principle put forward by the International Organisation of Securities Commissions, ‘ensuring markets are fair, efficient and transparent’.
Mr Lawton explains that fairness in markets requires a reliable price formation process with effective detection and deterrence against improper trading practices. Investors also need to be given fair access to market facilities, markets and price information. Efficient markets will reflect the dissemination of relevant information in a timely way in the price formation process. However, vital to achieving this is getting the right level of transparency, the right degree of pre- and post-trade information, publicly available on a real-time basis.
Mr Lawton states that maintaining the integrity of the price formation process can be seen throughout the FCA’s market agenda. He then discusses some of this agenda under the following broad themes:
- strengthening public markets. Mr Lawton mentions that in order to achieve an optimal price formation process, a balance needs to be achieved between what competition can offer, a reduction in transaction costs and a facilitation of best execution, and the associated risks of fragmentation, increased search costs and reduced liquidity. Mr Lawton also states that MiFID II’s significance to market structure and price formation is hard to underestimate in that it revises the transparency regime for equities and introduces a principle of transparency for non-equity instruments such as bonds and derivatives. MiFID II also contains measures to cap dark trading in individual shares both at a venue and overall level at 4% and 8% respectively;
- decentralised markets. Mr Lawton states that the response to the challenges to price formation is a push from regulators that transparency is king. There is throughout asset classes, instruments and markets a drive, in keeping with G20 Pittsburgh commitments, to push trading that can be done on organised venues, onto organised venues. Doing this will ensure that authorities have an overview of the systemic risk building up and stronger risk management and controls can be put in place around that risk; and
- pricing mechanisms outside markets. Mr Lawton notes that there are a range of mechanisms used off market to generate prices that are typically not recognised as part of the price formation process, but nonetheless can set or influence key prices which impact on financial markets. One example of this where work has recently been done is price reporting agencies. Beyond this is the course of broader work on benchmarks. In other mechanisms, such as mark to market and mark to model valuations, there has been work to improve independence and governance around these processes.
View Price – the cornerstone of markets, 3 February 2014