20 September 2017
Steve Grob

Fidessa Fragmentation Index

Steve Grob - Fidessa

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Central Risk Books - the new black for capital markets

20 September 2016  |  4734 views  |  1

I first came across the term "central risk book" at an event in Rome a couple of weeks back. It seems like it's the banks’ answer to the dark pool caps that will be upon us in a little over a year. As of January 2018 banks won't be able to operate their own dark pools in their current form and it seems that the preferred option is to become Systematic Internalisers and trade on a principal basis with clients. The purpose of the CRB in all this is to act as a huge repository for all the firm's positions. Then, someone with a brain the size of a small planet sifts through all this and works out what the net exposure of the bank is. Furthermore, the quants will be able to see natural hedges on a holistic basis which enables the bank to provide liquidity at a keener price.

This should give the larger players an edge over smaller brokers that simply don't see the same levels of flow. It should also enable banks to use their capital to trade with clients in the most efficient way possible.

There are a couple of rinky dinks as always, though. First, SIs are obligated to provide a quote feed on any stocks they are trading. It's not clear, though, how accessible this feed needs to be by the market in general and whether these quotes are hittable and, if so, by whom. More important, though, is what happens when we have the next black swan event and there’s a mad rush for the exits again.

I guess we just have to hope that those quants have got it right…

 

TagsTrade executionRisk & regulation

Comments: (1)

Xavier Barrier
Xavier Barrier - CSC - Paris | 21 September, 2016, 10:14

Systematic Internalisation is part of Mifid I since 2007. Although only few SIs remains yet : most banks did opt for "Dark pools" at the end. Question is why? Could it be cost of Capital to run an internal risk book? Then will Mifid II change this? 

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job title Director of Group Strategy
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I am responsible for strategic development at Fidessa. This includes the development of new geographic markets and strategic partnerships and driving new industry initiatives. As part of this I head u...

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