This article was written by James O’Neill, a Director of ILQ Australia Pty Ltd.
ASIC-regulated brokers offering pricing feeds with top of book pricing should evaluate their procedures to ensure that they are compliant with Australian financial services law and consumer law. Top of book of book pricing refers to the highest bid and lowest ask offered in a prevalent market.
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Generally, top of book is an off-market price – more often than not, top of book is quoted by an investment bank or Prime Broker
Prime Broker
Prime brokers are the designation given to individuals handling a package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return.There are two types of prime brokers - bank and non-bank corporations. Traditionally major global investment banks have been the predominant players in the space, however recent years have proven that there is space for non-bank liquidity providers that sometimes can deliver a better service than traditional financial institutions.Prime brokers are earning on commissions, spreads and overnight margin lending. Brokers which are operating STP flows in sufficient size are the main contenders to have a direct relationship with a prime broker, while smaller firms are relying on prime of primes to access a pool of prime brokers.What Roles Do Prime Brokers Perform?Prime brokers are responsible for a wide range of services, which typically include global custody such as clearing, custody, and asset servicing. Additionally, these individuals are also tasked with securities lending and financing, in a bid to facilitate leverage of client assets.The individuals can also provide hedge fund managers with portfolio reporting needed to effectively manage money as well as operational support. Prime brokers act as a hedge fund's primary operations contact with all other broker dealers.Finally, many prime brokers also look to provide additional value-added services, such as risk management and capital introduction.Of note, larger prime brokerage firms today usually monitor the risk within client portfolios through house-designed risk-based margin methodologies. These are helpful in considering the worst-case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the portfolio.
Prime brokers are the designation given to individuals handling a package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return.There are two types of prime brokers - bank and non-bank corporations. Traditionally major global investment banks have been the predominant players in the space, however recent years have proven that there is space for non-bank liquidity providers that sometimes can deliver a better service than traditional financial institutions.Prime brokers are earning on commissions, spreads and overnight margin lending. Brokers which are operating STP flows in sufficient size are the main contenders to have a direct relationship with a prime broker, while smaller firms are relying on prime of primes to access a pool of prime brokers.What Roles Do Prime Brokers Perform?Prime brokers are responsible for a wide range of services, which typically include global custody such as clearing, custody, and asset servicing. Additionally, these individuals are also tasked with securities lending and financing, in a bid to facilitate leverage of client assets.The individuals can also provide hedge fund managers with portfolio reporting needed to effectively manage money as well as operational support. Prime brokers act as a hedge fund's primary operations contact with all other broker dealers.Finally, many prime brokers also look to provide additional value-added services, such as risk management and capital introduction.Of note, larger prime brokerage firms today usually monitor the risk within client portfolios through house-designed risk-based margin methodologies. These are helpful in considering the worst-case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the portfolio.
Read this Term where that provider has overweight exposure to a certain currency. To entice market participants to take the opposite position, these providers will often quote a price better than the prevailing market.
For example, a provider may be overweight EURUSD. To sell off this position it may quote pips lower than the prevailing ask price. Conversely, another provider may be underweight EURUSD. To sell out this position, provider two will quote bid prices for EURUSD lower than other providers and the prevailing market. The bid-ask for these two providers will form the top of book price.
Erring on the side of caution
There is nothing inherently illegal about this practice, to the contrary, it forms these providers’ Risk Management
Risk Management
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent.
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent.
Read this Term system in line with s 912A(1)(h) of the Corporations Act 2001 (Cth). However, where brokers need to err on the side of caution is where they use top of book pricing without hedging the risk and quote these prices with limited depth.
Often brokers may do this to entice traders who will see tight spreads which they have limited prospects of hitting with any reasonable flow. Such practices will likely fall foul of the corporate regulator either under the s 12DA of the ASIC Act 2001 (Cth); s 35 of the Australian Consumer Law; or through the catch-all obligation under s 912A(1)(a) for AFS Licensees to act honestly, fairly and efficiently.
Section 12DA of the ASIC Act 2001 (Cth) provides that a person shall not ‘in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive’.
While section 35 of the Australian Consumer Law relates to bait advertising asserting: “A person must not, in trade or commerce, advertise goods or services for supply at a specified priced if there are reasonable grounds for believing that the person will not be able to offer for supply those goods or services at that price for a period that is, and in quantities that are, reasonable, having regard to the nature of the market in which the person carries on business and the person is aware or ought reasonably to be aware of those grounds.”
Exercising care with consumer law provisions
As an example, ABC Brokers quotes top of book pricing on its majors including EURUSD and AUDUSD. ABC Brokers receives its price feeds from a prime broker but except in exceptional market conditions manages its own risk internally. ABC Brokers quote prices for the majors with prices good for 5 lots.
Once 5 lots are placed on any one pair, the next best price is substantially higher, but top of book is still quoted. ABC Brokers know or ought to know that the top of book price will be filled and that many clients will seek to execute at that price but will be slipped. In this scenario, the broker is likely to have contravened a number of financial services and consumer law provisions and have breached their obligations as holders of AFSLs.
This article was written by James O’Neill, a Director of ILQ Australia Pty Ltd.
ASIC-regulated brokers offering pricing feeds with top of book pricing should evaluate their procedures to ensure that they are compliant with Australian financial services law and consumer law. Top of book of book pricing refers to the highest bid and lowest ask offered in a prevalent market.
[gptAdvertisement]
Register now to the London Summit 2017, Europe’s largest gathering of top-tier retail brokers and institutional FX investors
Generally, top of book is an off-market price – more often than not, top of book is quoted by an investment bank or Prime Broker
Prime Broker
Prime brokers are the designation given to individuals handling a package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return.There are two types of prime brokers - bank and non-bank corporations. Traditionally major global investment banks have been the predominant players in the space, however recent years have proven that there is space for non-bank liquidity providers that sometimes can deliver a better service than traditional financial institutions.Prime brokers are earning on commissions, spreads and overnight margin lending. Brokers which are operating STP flows in sufficient size are the main contenders to have a direct relationship with a prime broker, while smaller firms are relying on prime of primes to access a pool of prime brokers.What Roles Do Prime Brokers Perform?Prime brokers are responsible for a wide range of services, which typically include global custody such as clearing, custody, and asset servicing. Additionally, these individuals are also tasked with securities lending and financing, in a bid to facilitate leverage of client assets.The individuals can also provide hedge fund managers with portfolio reporting needed to effectively manage money as well as operational support. Prime brokers act as a hedge fund's primary operations contact with all other broker dealers.Finally, many prime brokers also look to provide additional value-added services, such as risk management and capital introduction.Of note, larger prime brokerage firms today usually monitor the risk within client portfolios through house-designed risk-based margin methodologies. These are helpful in considering the worst-case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the portfolio.
Prime brokers are the designation given to individuals handling a package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return.There are two types of prime brokers - bank and non-bank corporations. Traditionally major global investment banks have been the predominant players in the space, however recent years have proven that there is space for non-bank liquidity providers that sometimes can deliver a better service than traditional financial institutions.Prime brokers are earning on commissions, spreads and overnight margin lending. Brokers which are operating STP flows in sufficient size are the main contenders to have a direct relationship with a prime broker, while smaller firms are relying on prime of primes to access a pool of prime brokers.What Roles Do Prime Brokers Perform?Prime brokers are responsible for a wide range of services, which typically include global custody such as clearing, custody, and asset servicing. Additionally, these individuals are also tasked with securities lending and financing, in a bid to facilitate leverage of client assets.The individuals can also provide hedge fund managers with portfolio reporting needed to effectively manage money as well as operational support. Prime brokers act as a hedge fund's primary operations contact with all other broker dealers.Finally, many prime brokers also look to provide additional value-added services, such as risk management and capital introduction.Of note, larger prime brokerage firms today usually monitor the risk within client portfolios through house-designed risk-based margin methodologies. These are helpful in considering the worst-case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the portfolio.
Read this Term where that provider has overweight exposure to a certain currency. To entice market participants to take the opposite position, these providers will often quote a price better than the prevailing market.
For example, a provider may be overweight EURUSD. To sell off this position it may quote pips lower than the prevailing ask price. Conversely, another provider may be underweight EURUSD. To sell out this position, provider two will quote bid prices for EURUSD lower than other providers and the prevailing market. The bid-ask for these two providers will form the top of book price.
Erring on the side of caution
There is nothing inherently illegal about this practice, to the contrary, it forms these providers’ Risk Management
Risk Management
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent.
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent.
Read this Term system in line with s 912A(1)(h) of the Corporations Act 2001 (Cth). However, where brokers need to err on the side of caution is where they use top of book pricing without hedging the risk and quote these prices with limited depth.
Often brokers may do this to entice traders who will see tight spreads which they have limited prospects of hitting with any reasonable flow. Such practices will likely fall foul of the corporate regulator either under the s 12DA of the ASIC Act 2001 (Cth); s 35 of the Australian Consumer Law; or through the catch-all obligation under s 912A(1)(a) for AFS Licensees to act honestly, fairly and efficiently.
Section 12DA of the ASIC Act 2001 (Cth) provides that a person shall not ‘in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive’.
While section 35 of the Australian Consumer Law relates to bait advertising asserting: “A person must not, in trade or commerce, advertise goods or services for supply at a specified priced if there are reasonable grounds for believing that the person will not be able to offer for supply those goods or services at that price for a period that is, and in quantities that are, reasonable, having regard to the nature of the market in which the person carries on business and the person is aware or ought reasonably to be aware of those grounds.”
Exercising care with consumer law provisions
As an example, ABC Brokers quotes top of book pricing on its majors including EURUSD and AUDUSD. ABC Brokers receives its price feeds from a prime broker but except in exceptional market conditions manages its own risk internally. ABC Brokers quote prices for the majors with prices good for 5 lots.
Once 5 lots are placed on any one pair, the next best price is substantially higher, but top of book is still quoted. ABC Brokers know or ought to know that the top of book price will be filled and that many clients will seek to execute at that price but will be slipped. In this scenario, the broker is likely to have contravened a number of financial services and consumer law provisions and have breached their obligations as holders of AFSLs.