I wrote a while ago about the impact on fragmentation

caused by an outage at NYSE Euronext (see

href="http://fragmentation.fidessa.com/2009/04/21/the-croissant-hypothesis/"

target="_blank">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 title="Get involved"

href="http://fragmentation.fidessa.com/get-involved/"

target="_blank">please let me know.