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"Light travels faster than sound.

Isn't that why people appear

bright before you hear them speak" (Humorous Quote by
Steven Wright).
I am using this quote to illustrate this one classic example of 'when regulators
know not what they are doing'. And instead of shedding light, they bring forth
a worst kind of darkness. They try to defend something that they don't
comprehend. They repeal rules without really understanding the circumstances
that brought about these rules in the first place. While they claim to fight for
transparency, market integrity and market quality, their actions do the reverse
by restricting market surveillance to one entity or body. In defending their
untenable position, they cite as reason something to this effect, wit: "Studies
have shown blah...blah" to support their position without citing the specific
studies. We know that whenever someone uses that kind argument, he or she
is engaging in deception, pure and simple. If indeed that there are studies
which support their position, why are they afraid to reveal these studies so
that a proper, objective and intelligent review of these studies can be made.
Thus, a comparison can be made with studies that yield contrary findings.
With regards to the issue at hand, I can cite specific studies to show that
market quality measures such as confidence, liquidity and efficiency improves
in trading regime when counterparty identities are known. And one such
study is that of the Korean Stock Exchange - a study titled "Shining a
Spotlight on the Counterparty Identity in the World's Best Lit Market", by Thu
Phuong Pham, Peter L. Swam and Joakim Westerholm. Another earlier study
titled "Effects on Fragmentation and Market Quality When ASX Moves
Towards A More Anonymous Market" done at the University of Sydney, also
shows that market quality suffers in an anonymous trading regime.
I am really keen to know from which studies Roel A Refran based his assertion
that Studies have shown that removing broker identifiers has had the effect
of minimizing spreads which is one of the desired goals of any market. With
lower bid-ask spreads, costs of transactions are minimized and the benefits
redound to all types of investor, including both retail and institutional
I have a strong belief that he based this assertion primarily on the Foucault,
Moinas and Thiessen (2007) study titled Does Anonymity Matter in Electronic
Limit Order Markets (Review of Financial Studies, 20(5) pp. 1707 -1747) and
ComertonForde, Frino and Mollica's study (2005) entitled Impact of Limit
Order Anonymity on Liquidity: Evidence from Paris, Tokyo and Korea (Journal
Economics and Business, (57)6 pp.528-540).
The fact is other researchers have questioned the methodology used in these
two studies. Maher (2008) for instance questioned the variables that were
used to control the bid-ask spread determinants in the Foucault, Moinas and
Thiessen study. Majois, another researcher also contended that the study did
not take into consideration global liquidity factor.
The point that I wish to raise here is like in any other research, we need to
take into account methodological issues before we draw conclusions.
My own review of existing literature really shows that studies on the impact of
anonymous trade and non-anonymous trade on Liquidity is really inconclusive
with different researchers, using various methodologies and techniques of
Regression Analysis, arriving at different conclusions.

On the popularity of Anonymity Trading regime, the truth and fact of the
matter is that after the stock and financial crisis in the US in 2008/2009, there
are now measures to move against anonymous trading in 'dark pools'.
Similarly, the EU is also looking at measures to curb anonymous trading and
by its nature the manipulation of markets. I am thus amused that while other
countries/exchanges are closing in on 'dark' pools, the PSE is opening the
floodgates for the creation of 'dark pools'.

Undeniably too, retail investors are also worried about anonymity trading. The
reason is simply that with anonymity trading, these markets are now rigged
in favor of the institutional investors. For those exchanges that were so eager
to embrace it, they are now moving quickly in dealing with the serious
ramifications which they had either dismissed outright or downplayed in the
early days. Let's take a look at the measures these Exchanges are doing. In
actions mimicking what they did in a race to introduce anonymity trading and
by de-facto dark pools, today they are rushing to quell the 'monster' called
dark pools.

It is interesting to note that the London Stock Exchange, in response to the
actions that is being taken in the major Exchanges in the EU, is looking at a
measured step to limit transactions within the 'dark pool' (anonymous trading
platform) by capping it to a max of 10%, with any excess to be executed via
an auction system. It is an accepted fact that there is information asymmetry
in the market and that informed traders benefits from a broker anonymity
regime as compared to non-informed traders and that in exchanges in UK
where there is a choice for traders to select between a anonymous market
and a non-anonymous trading platform, informed traders tend to migrate to
the earlier platform. This has created market aberration that this 10% limit is
now being considered to address this challenge.

I am also taken aback by the abuse of the word "best practice" in describing
'broker anonymity' in this article. If best practice is taken to mean a
commercial practice that is prescribed and accepted as correct or effective,
then certainly this 'broken' broker anonymity practice which both the US and
EU exchanges are working to fix will not qualify. By the way, the reason why
most of the Exchanges in the US and the EU adopted 'broker anonymity' is
not because of the inherent goodness of the system. The adoption was
basically driven by competition among them. I am equally stunned by the
over-emphasis of liquidity as a measure of market effectiveness in the light of
the claim that "ensuring the integrity of the market is at the core of the
functions of the Exchange" in this article. Liquidity and transparency are not
mutually inclusive as there is such a thing as 'dark liquidity' which is basically
liquidity for the 'big boys' (read the 'more informed') at the expense of the
small investor (read the 'less informed') and liquidity for those who can (and if
they want to) front-run or fix prices.
Let me just end this brief with an explanation on the logic of the current practise
in which pre-trade orders posted at the PSE or other similar exchanges do not
show brokers identifiers but while post-trade orders which have been matched
shows both the buyer and seller. There are two primary reasons behind this
arrangement. Firstly, this is meant to be a check and balance against any
collusion between the buyer and seller. Second, as I have mentioned earlier
since there exist asymmetry in information in the market, the post-trade identity of
buyers and sellers compensate those less informed traders by giving them
information on what is happening who is buying and selling that can serve as
a guide in their trading decision. Certainly, the intent was never to create a
herding mentality when this arrangement was first conceptualized. In fact this
represent a good balance to ensure liquidity, fair pricing and transparency. While
pre-trade anonymity allows large institutions to buy and seller large volume
without signaling such move in the market, the post-trade broker identity gives
other buyers and seller flow information to guide their decisions.

Caveat: This comment reflects my personal view and does not reflect the
stand of any of the organizations that I am affiliated. The intent of this short
brief is to tease, 'disturb the mind' and stimulate discussion among market
participants and the investing public.