The Rise of the Micro MTF - Cheaper or Smarter? – 7 September 2009
First Published Tuesday, 29th September 2009 07:53 am from Fidessa : Fidessa
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It was great to spend some time
in Stockholm last week and even better to get so much positive
feedback on our new improved coverage of the Nordic region.
When I got back, though, I
noticed that a less well known MTF - QUOTE MTF - had announced
that it had "gone live". QUOTE MTF is backed by SwiftTrade and is
representative of the new breed of micro MTFs that are seeking to
challenge the business models of the "traditional" MTF community.
In QUOTE MTF's case it is offering a very aggressive maker/taker
pricing model that charges just 0.14 bps for removing liquidity.
Obviously, this assumes that the liquidity is actually there to
be taken. There's no point advertising that you have the lowest
priced baked beans if you don't actually have any tins on the
shelves.
Other examples of micro MTFs
include TOM, the joint venture between Optiver and BinckBank, and
the investment in Equiduct by Citadel Securities. These
initiatives do not necessarily need to make any money through
trading fees. Instead, they are betting that their pricing
engines will be so finely tuned that they can extract value
simply by swimming upstream against order flow, i.e. through
their market making
activities.
In some ways this is similar to
how the big boys make money internalising order flow. What makes
it all a bit confusing, though, is that these entities are viewed
differently by the regulators and so it's difficult to
get a clear picture of what's really going on. It will
also be interesting to see if these new initiatives can attract
sufficient order flow so that they force themselves onto the best
execution "radars" of the wider broker community and so attract
even more flow. Either way, this type of business model looks
like it will be highly effective as the intellectual and
financial investment required to build pricing engines means that
this is a hard area to
commoditise.
One thing that is certain is
that the market needs to better understand the complete trading
patterns for any given stock - something that the boffins at
Fidessa Labs have been working on over the summer, in fact. I
hope to be able to bring you the results of their endeavours
soon.
