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The Rise of the Micro MTF - Cheaper or Smarter? - 7 September 2009

Fidessa : Fidessa - 1st January 1970

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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.