The Bacon Roll Theory – 16 October 2009
First Published Friday, 16th October 2009 02:06 pm from Fidessa : Fidessa
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I wrote a while ago about the impact on fragmentation
2009). Well, we had another chance to re-run the experiment here
in London this week. Basically, what happened was that on
Wednesday the LSE suspended trading in a small handful of stocks
because of some technical glitch in part of its market data feed.
Spotting the opportunity, all the MTFs enthusiastically emailed
the market confirming that they were still open for trading in
the stocks in question. But, just as happened in Paris back in
the spring, the expected surge in fragmentation failed to
materialise and London traders simply munched on their bacon
rolls until the LSE fixed the problem a few hours
This was shown by the fact that the
average FFI of the stocks in question (2.25) was, in fact,
slightly lower on Wednesday than it had been for the previous
This highlights, yet again, the
subtle interplay between the MTFs and the primary markets. There
appear to be three reasons for this. Firstly, the primaries are
responsible for maintaining an orderly market in the stocks they
list and so traders are reluctant to trade a stock without its
"parent exchange" being open. Secondly, a lot
of liquidity providers use the primary market price as the
starting point for their calculations - without this they simply
can't make markets in those stocks. Finally, there is
the psychology of the market that still feels that stocks
"belong" to particular markets.
So, the paradox of the current situation is that without
the primaries the MTFs simply couldn't exist. The bizarre
implication of this, then, is that the LSE could beat the MTFs
simply by taking its ball home and refusing to come out to play
at all but, that way, everyone loses. More likely is that the
calls for a consolidated tape will be re-ignited yet again but,
in order to really fix the problem, any such tape would need to
be fully mandated by the industry. My suggestion is that we all
get together to define this and fix the problem - otherwise we
may find the regulators doing it for us.
you would like to be part of such an initiative then title="Get involved"
target="_blank">please let me know.