The Last Look…
Posted by Colin Lambert. Last updated: May 13, 2025
Equity markets are strange, in the US especially, because everything about them seems intended to benefit market makers. I have no problem with this per se, I have thought for too long that FX markets undervalue liquidity, but the current arguments over private rooms in equity markets highlight how the market structure definitely benefits certain types of player.
Private rooms are nothing new in FX markets of course, think tailored liquidity, and it seems only a matter of time that they enter equity markets, especially given how I am increasingly hearing that those markets are looking to FX-type mechanisms (it started here). I am unsure exactly what the problem is that some firms have with private rooms in equity markets, but it seems to revolve around our old friends, transparency and equality of access.
This is how things have been done in equity markets for decades of course, so change will always take time, but as I have argued before (also for decades!) total transparency and best execution rarely go together. They do when we are talking small tickets, but increasingly investors are looking to execute larger blocks, and there, transparency is the enemy of best execution.
It is hard to look at the arguments of those opposed to private rooms and think anything other than this reflects their style of trading – have the fastest technology, put in prices, and churn and burn any position for a small, repeatable, return. Of course, outside of private rooms (and dark pools for that matter), few large tickets are executed on market in a single clip, which means, prices being impacted by every trade, that we see information leakage.
The problem here is not the new approach to equity trading, it is an old, and inflexible, approach to market making
It seems clear to me that some market maker strategies require a degree of information leakage – be top of book in the smallest amount possible and then leverage the information. Is it legal? Mostly. Is it ethical? Is anything ethical in markets? More pertinently, is it a good enough argument for a regulator to put a stop to the use of private rooms? Absolutely not.
There is nothing wrong in firms fighting their corner with regulators of course, but the root of the problem is the lack of flexibility in how people trade in these markets. There is equally nothing wrong with private rooms, as a liquidity consumer I would argue you have the right to select who you want to price you – some do not agree and are clearly worried they will be shut out.
Perhaps the idea is for a firm to look at why it might be shut out of private rooms? I would suggest it is because of execution quality and information leakage – assuming the clients actually use the data that is available to them! Rather than try to ban private rooms, surely the better approach is to add another string to the market making bow, because the problem is not the new approach to equity trading, it is an old, and inflexible, approach to market making.
