Is it possible to have a trading transaction where there is no third party involved and both counterparties are aware of each other? It may be possible because there is a model that offers direct streaming that can be an alternative to traditional trading on a venue.
What is a direct price stream?
Direct price stream is when a liquidity provider streams prices where they are executed directly to the other party involved. This model aims to create a trading world with direct and bilateral streams. And when we say direct streams, we mean that dealers, brokers, and buyers can get almost all the things in the information they need in one place.
What sets a direct price stream from others?
People will see a different way of trading through this model. It will help brokers and dealers manage their costs because they can be able to automate the trade. Also, liquidity provision can help make profits because brokers and dealers can maintain their bilateral connection and relationships with clients and the buy-side.
Explaining a direct stream further
In a direct price stream, the brokers and dealers will continuously send prices and sizes that they are willing to buy and sell to their customers. The price differs from one size to another. The customer does not need to request to know the price and size and that they would prefer. In this case, information leakage is avoided before the trade. They will not leak trading moves because the brokers do not hesitate to stream firm prices. A customer can collect at the streams provided by the liquidity makers. The customers can customize their central limit order book (CLOB), where the included parties are ones that the customer knows and wants to trade with. It is convenient because the prices are the ones they prefer in line with their relationship to the other counterparties.
Customers can take the market liquidity transparency to another level more. They can collect liquidity from anonymous CLOB markets together with the liquidity providers’ direct streams. Some liquidity providers can still trade in those books and act with other participants that they do not connect with while being anonymous.
If it is possible, why are we not using it?
If the direct price stream becomes more recognized and widely used, then the electronic trading platforms will no longer need intermediation. But the million-dollar question is: is it even possible to happen?
It is possible, yes, but today, it is highly unlikely. In the late 1990s, US equity traders have already tried managing direct connections when transmitting orders and executions. They found it inefficient.
Platforms save the day.
Now, platforms do all the hard work. They save everyone from legal and operational work. Liquidity makers and takers can still trade with one another even in anonymity. Clients can input all their conditions and preference beforehand. However, the only concern when trading with an intermediary is that the brokers and dealers can still limit the information leakage.