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…
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:
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:
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.
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.
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:
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.
The below screenshot shows pre trade transparency on a trading screen from a stock exchange. For each share, the screen shows:
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:
|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|
|20-Apr-2018 10:26:00 840000
(given in pence i.e. £2.0975)
(given here in pounds)
(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, firstname.lastname@example.org
* 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.
Financial services regulatory consultancy, specialising in MiFID II: resources, training & tips