Fragmentation Diversifies – 14 October 2009
First Published Thursday, 15th October 2009 02:06 pm from Fidessa : Fidessa
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It's hard to miss the widening gulf in
fragmentation between the London Stock Exchange and the other
primary markets. The gap started to appear during the summer but
seems to have been widening to the point that fragmentation on
FTSE 100 stocks is now around 30% higher than in France or
Germany. NYSE Euronext and Deutsche Börse will doubtless be
monitoring the London situation carefully as, so far, the London
experience of fragmentation has been played out in mainland
Europe, too. Intuitively, you would expect fragmentation to be a
bit higher in London as the MTFs are based here but maybe there
are other reasons to support this gap.
these is BATS Europe which has led the way in aggressive pricing
against the primaries and, most recently, has been focussing
these efforts directly against the LSE. As a result of this,
BATS' market share in FTSE 100 stocks has doubled since
August but, of course, these incentives are not economically
viable in the long or even medium term and so the real question
is what happens to liquidity when the rebates are removed.
Obviously, MTFs can't expect to hold on to all the flow they win
in this way but, according to BATS' CEO, Mark Hemsley,
that's not the point. These discounted pricing campaigns act as
an incentive to get the market focussed on connecting to new,
alternative venues and to smooth out all the post trade workflow
issues. When the price incentives are removed then some liquidity
naturally shifts again but, as Mark points out, the damage has
been done because more trading firms are now connected to the
venue in question and confidence in their operating model is
The primaries will rightly argue,
though, that the MTFs still aren't making any money and so have
yet to prove that their business models are viable. As the MTFs
creep towards break-even, however, this argument may carry less
weight in the future. On this point, it was also interesting to
read that Chi-X has announced that as of the 1st January it will
users. If other MTFs follow suit then this could
further squeeze the primaries. Traders will be reluctant to
accept the current market data fees from the primaries if they
also have to write another cheque out to the MTFs for the same
thing. If this does happen it will reignite the whole
consolidated tape issue and will also open up the debate as to
who really "owns" this market data.
is most definitely not over, though. Just title="Fragulator"
target="_blank">fragulate any of the title="Top 20" href="http://fragmentation.fidessa.com/stats/"
target="_blank">most fragmented stocks and you can
see that in most cases "non-lit" trading accounts for around 50%
of the total traded volume. The obvious step for the primaries,
then, is to find ways of harnessing this flow. This could be
through the creation of liquidity aggregation services such as
those offered by the LSE's Baikal or through regulation - forcing
better transparency and reporting on non-lit venues.
No wonder everyone is busy lobbying the regulators over