At the beginning of September, BATS Europe announced

further extensions to its inverted pricing model to include FTSE

100 stocks. At the same time NASDAQ OMX Europe extended its

aggressive rebates, too. The LSE's approach to these pricing

pressures was to abandon its own maker taker price list and

revert to its wholesale discount model. This was widely seen as

favouring the big banks and brokerages which can generate high

volumes but was also seen by some observers as potentially

alienating the high frequency boys. This is because these firms

specialise in arbitraging between the different maker taker

discounts by rapidly moving orders from one venue to

another.

At first glance, it looks as if these

observers might be right. BATS narrowly beat Turquoise to third

place for the FTSE 100 trading and NASDAQ's volume across all

indices exceeded a billion Euros for the first time last

week.

Market Share by Venue href="http://fragmentation.fidessa.com/wp-content/uploads/capita-market-share-by-venue.png"> class="size-medium wp-image-813 alignleft" title="Market Share by

Venue"

src="http://fragmentation.fidessa.com/wp-content/uploads/capita-market-share-by-venue.png"

alt="" width="290" height="140" />

Also for the first time, a FTSE 100

stock,

href="http://fragmentation.fidessa.com/stats/stock/CPI.L.html"

target="_blank">Capita Group, has broken through the

3 barrier (FFI 3.06). As with most things, however,

it's never quite that simple. Dig a little deeper and

you can see that nearly 45% of the total volume in Capita was

traded away from lit order books entirely. In fact, just two

trades at Liquidnet accounted for nearly 7% of the entire volume

traded that week in Capita.

Market Share by

Category href="http://fragmentation.fidessa.com/wp-content/uploads/capita-market-share-by-category1.png"> class="alignleft size-medium wp-image-826" style="border: 0px;"

title="capita-market-share-by-category1"

src="http://fragmentation.fidessa.com/wp-content/uploads/capita-market-share-by-category1.png"

alt="" width="290" height="140" />

So, maybe darker forces are at work

here - it will be interesting to see how it all pans out. The

other question that all this poses is what happens when (and if)

the new alternative venues revert to normal pricing? Moreover,

what is "normal" pricing anyway? Most people agree that one of

the causes of fragmentation was that the primary venues lost the

initiative with the big banks and brokers. I wonder if the high

frequency traders will abandon the MTFs in the same way once all

the pricing games have been played out. What might take their

place? Maybe, as I wrote about last week, we will see a

continuation of the trend whereby market makers or liquidity

providers interact with order flow more directly without the need

for third party venues at all.

One thing that

does seem certain, however, is that everyone needs better

information about what is really happening across lit and dark

trading as the worlds of venues, brokers, market makers and

buy-sides continue to converge through technology.