Exchanges must overcome fair pricing barriers, Horizon Software says

By Sunniva Kolostyak

It is time exchanges bring pricing systems into the 21st century by introducing more accurate judgement models to the bid/ask spread, according to Sylvain Thieullent, CEO of Horizon Software.

As geopolitical events and a global pandemic have sparked equity market sell-offs, volatility and merger activity, it is time for exchanges to review the effects on market structure and pricing models, the CEO told IBS Intelligence.

October has been a month for exchange deal-making, with Euronext beating off stiff competition for the Milan stock exchange, to Cboe agreeing to purchase block trading venue BIDs. But the most immediate question is, with fewer venues to compete against, how can the likes of Euronext and Cboe ensure that trades happen in a fair and well-balanced market, Thieullent asks.

“For a while now, the issue of whether or not exchange members are trading too far away from what could be considered to be a ‘fair value bid/ask price’ has been a contentious one. The trouble is that to overcome this problem, many major venues have been using very clunky internal systems which have proven to be highly inefficient when it comes to displaying accurate prices.

“As a consequence, exchanges have been unable to push away prices that fall outside of the bid/ask spread, and members have been executing on poor prices as a result, he said.

This problem was exacerbated across March and April when the combined force of a Russia and Saudi Arabia oil dispute and COVID-19 sparked the biggest global equity market sell-off since the financial crisis. And, as is common with spiralling stock prices, some markets profit, leading to the debate on whether high-speed traders take advantage of price discrepancies is good or bad for markets.

Thieullent, however, believes that this is the wrong debate to have. Instead, we should be looking at the exchanges’ approach to pricing. Currently, there is not only a mandate on the exchange to ensure that the trade is happening at the right price, but that the rationale behind the price is well-defined.

“While rules are in place alongside a willingness on behalf of the exchange community to abide by them, it is underlying systems and approaches that underpin pricing that need to enter the 21st century.

“Not by limiting high-speed trading by deploying speed bumps during the next bout of volatility, but by exchanges becoming more accurate in their judgment around the size of the bid/ask spread. This change in approach is important, not just for the more illiquid equity futures and options contracts, but for the securities that trade frequently as well.”

The Horizon Software CEO added that now is the perfect time for exchanges to act as there will be increasing investor and regulatory pressure on members with regards fair pricing post the recent takeovers.

“As part of a wider industry drive to better serve the end investor, exchanges know they have a responsibility to ensure trades can happen at a fair price. With further deals imminent, such as the LSE takeover of Refinitiv, the bigger venues will only continue to get bigger. It is therefore paramount that underlying these challenges are finally addressed so that members don’t feel that less competition among exchanges will lead to poorer pricing,” Thieullent said.