I wrote a while ago about the impact on fragmentation caused by an outage at NYSE Euronext (see The Croissant Hypothesis, April 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 later.
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 week (2.3).
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.
If you would like to be part of such an initiative then please let me know.