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.

One of

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

established.

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

start to introduce

href="http://www.chi-x.com/trading-notices-pdfs/trading-notice-0192.pdf"

target="_blank">market data fees for some non-trading

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.

The game

is most definitely not over, though. Just title="Fragulator"

href="http://fragmentation.fidessa.com/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

dark trading.