Understand what pre and post trade transparency means in less than 8 minutes

Pre and post trade transparency rules were given a big overhaul under MiFID II, especially for non-equities (bonds, derivatives) and it’s likely to continue being an area of focus as regulators watch the impact of these rules on the markets. But before getting into the nitty gritty of double volume cap, waivers, deferrals and all the rest, the first question is do you know what pre and post trade transparency is? (And if you don’t, you’re not alone). Read on…

Understand what pre and post trade transparency means in less than 8 minutes

  1. Big picture

Transparency is principally about the price of financial instruments (e.g. shares, bonds, derivatives) being visible – transparent – to other investors in the market. Pricing breaks down into two parts:

  • pre trade: this is the pre sale price, what the buyer hopes to pay and the price the seller hopes to sell for (i.e. the bid/offer price); and
  • post trade: the price actually paid.
  1. On to the housing market…

This is what pre and post trade transparency looks like in the housing market.

Starting with pre-trade, imagine you want to sell a flat: you’ve had it valued and you agree the estate agent can put it on the market for £350,000. This is the price you hope to sell for. Maybe the property goes on Zoopla* or Rightmove*.

All the prices of properties listed on Zoopla and Rightmove are the sellers’ pre-trade prices and, as other buyers and sellers can see these prices, they’re transparent. Zoopla and Rightmove are good examples of pre-trade transparency in the housing market (but all estate agents which show prices of properties for sale either on their websites or in window displays are displaying a type of pre trade transparency).

However, you might not get £350,000 for your flat. It depends on a number of other factors: how many other properties are on the market at that time, demand, quality… (you know all this). So, suppose that after a couple of months and several viewings you decide that an offer on the table of £320,000 is likely to be the best you’ll receive and you sell for that price.

Therefore, in this example:

  • the flat’s pre-trade price is £350,000**
  • the flat’s post-trade price is £320,000.

Assuming the pre trade and post trade prices are listed somewhere visible so that other property buyers and sellers can see them, for example, on Zoopla (pre trade) and on Mouseprice* (post-trade), they are also transparent. 

Why do you need both pre and post trade prices?

There’s often a difference between the pre trade and post trade price for a financial instrument or house and people in the housing market, just like in the financial markets, need both pieces of information to help them make the best decision.

The importance of knowing both struck me recently, when I saw that a local estate agent had put a house on the market for £550,000 (the pre trade price). I knew an almost identical house on the same street had sold for £450,000 (the post trade price of the same ‘instrument’) less than twelve months ago, which anyone could look up on Mouseprice. Had the market for this type of house in this area really shot up that much in a year…?

In this situation, if the potential house buyer relies solely on the pre trade price, s/he could end up paying far too much. If s/he relies solely on the post trade price of the last similar property, they are not taking into account whether and how the market has moved in the interim: both prices help them better gauge the market.

It’s the same for financial market participants: they’re looking for as much information as possible about the financial instrument they want to buy/sell to avoid over-paying or under-selling. The pre and post trade prices are a crucial part of the data they use to make their decisions.

A few points on the differences between the housing market and financial markets

The above example uses the housing market to show what is pre and post trade transparency in a market we’re all familiar with but of course there are some major differences between the housing and financial markets. In particular:

  • Both bid and offer prices are transparent in financial markets*** whereas only offer prices (the seller’s price) are transparent in the housing marketBack to Zoopla and Rightmove: the offer price of properties are shown, however, the bid prices (the price the buyer wants to pay) are not. Why? Because if you put a £200,000 bid on a house selling for £240,000 and this information was made available to other potential buyers, they can use it to make a slightly more attractive offer (say put in a bid of £201,000). In effect, making this bid information transparent could move the market against you.
  • People usually buy one property at a time whereas financial instruments are bought in much larger quantities. So, financial information includes the quantity of financial instruments bought and sold, as well as the price.
  • Each house is unique whereas financial instruments traded on trading venues (such as shares) are standardised. The price paid for each property is based on taking into account the combination of its unique features (number of bedrooms, size, condition, location etc.). In contrast one vodafone share is the same as all other vodafone shares. This standardisation facilitates trading.
  • The housing market moves very slowly compared to the financial marketit takes people a long time to accept that the price of their property has decreased (though not increased funnily enough…) whereas share prices can jump around second by second (or even intra-seconds). Therefore, under MiFID II, regulators require the price paid for the financial instruments – the post trade price – to be visible within seconds and minutes of the transaction being completed, not weeks.
  1. Putting it together – on to the financial markets

The below example shows what high level pre and post trade transparency looks like when trading shares on a stock exchange, the most well known financial market. But it’s worth noting that what pre and post trade transparency looks like will depend on the financial instruments being traded and the way in which they are traded.

Pre-trade transparency in shares:

The below screenshot shows pre trade transparency on a trading screen from a stock exchange. For each share, the screen shows:

  • the best bid price (the highest price investors are willing to pay per share)
  • the best offer price (the lowest price investors are willing to sell per share)
  • the volume of shares bought (Vol B), the volume of shares offered (Vol O) (sold) and the total volume of shares traded, in a given time period.

Post-trade transparency in shares

The below table gives an example of the information provided in a post trade report for one trade (in this example, a trade in Vodafone shares). The report must contain:

  • the price paid for the financial instruments
  • the number of instruments traded and
  • the date and time at which the trade took place.

 

Code for share Time/date of trade Price Price currency Volume Trade Value Venue of execution
E.g. ISIN Note the time can go down to intra-seconds, reflecting the speed of high frequency trading. Price paid: (the post trade price) Euros, pounds, dollars etc. Number of instruments traded Price multiplied by number of shares bought/sold Trading venue e.g. London Stock Exchange. XOFF means the trade was executed outside a trading venue

Example: Vodafone

GB00BH4HKS39

20-Apr-2018 10:26:00 840000

 

 

209.75

(given in pence i.e. £2.0975)

GBP

(pounds)

2,876 6,032.41

(given here in pounds)

XLON

(code for London Stock Exchange)

Unless there is an exemption, a trade in a share must be published so that it is transparent – visible – to other traders/ investors as close to real time as possible and within one minute of the trade taking place.

You can take a look at a post-trade report on TRAX’s website, which makes the information available for free after 15 minutes, at: https://traxapa.com/apa-publication/index.html#/trades

If you’re looking for help with MiFID II, please get in touch for a chat: 0044 7384 711 834, catherine@moxierules.co.uk

* Zoopla and Rightmove are popular websites in the UK which list millions of properties for sale. Mouseprice shows the prices at which UK properties have been sold, using information from sources such as the Land Registry.

** On a trading venue the pre-trade price of £350k would have been updated to £320k before the trade took place.

*** There are exceptions to making pre and post trade prices transparent, known as waivers and deferrals, but that’s another article for another day.

 

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