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Can't see the wood for the trees? - 21 June 2010

Fidessa : Fidessa - 1st January 1970

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It is not always easy to get a clear understanding of what's going on when confronted by large amounts of data. The usual solution to this is to step back in order to get some perspective and understand the bigger picture. The other approach is to zoom in on a small part of the detail and see if it is representative of the whole.

Take a look at the FFI for Big Yellow Group, a FTSE 250 stock, for the week ending 18 June:

Fidessa Fragmentation Index

Despite the fact that its FFI is above 2 it was actually only the 50th most fragmented stock in the FTSE 250 last week. This shows just how deep the impact of fragmentation has become and how it has gone way beyond the blue chip stocks that it all began with and is now affecting even those stocks with relatively low turnover.

Dig a little deeper and the Fragulator shows an even more interesting picture.

In that same week, just under 60% was traded on lit venues whilst the rest was spread over dark MTFs, Systematic Internalisers and OTC trading. However, the average trade size between the dark MTFs and the lit venues was almost identical and so you have to wonder, at least in this case, whether the extra cost and hassle of routing to the dark books was actually worth it. When you consider that the seven dark books concerned accounted for less than 7% of that week's volume you start to wonder whether the best execution imperative is all going a bit too far.

This seems to be especially the case for the buy-side, many of whom prefer to deal in chunky blocks rather than have their orders diced into smaller and smaller pieces and sent spinning round lit and dark platforms in search of a partner.

This extra confusion means that the buy-side has to work harder and harder to form a view as to how stocks are really trading so as to make sure that they are being effective. This makes it difficult to select the right broker and to assess their executional effectiveness.

Maybe what we need is a concept of "good enough" execution as the extra cost and complexity involved in going for "best" is making it harder and harder to achieve.