It was Spain's turn this week to host the latest in our series of global Fragmentation Forums. Around 50 of Spain's top financial executives gathered at the Miguel Ãngel hotel in Madrid to discuss and debate the future of Spain's equity markets.
Spain is a unique outlier in the global fragmentation 'experiment'. Despite being part of Europe and subject to the MiFID best execution requirements introduced in November 2007, alternative venues have found it almost impossible to establish a foothold there. This is borne out by the data. Whilst the FFI of most of Europe's major indices has been well above 2 for a good while now, the FFI of Spain's benchmark IBEX 35 has risen from 1 in 2007 to just 1.05 today. There are a number of structural and cultural reasons for this but maybe that's all about to change. The peculiar reporting rules that concentrate flow on the BME are about to go which may well open the floodgates for the alternative community. It's certainly worth them trying as volumes in Spain are roughly equivalent to those in Switzerland where the alternative venues have been piling in for a while now. As with all markets the real issue will be the enthusiasm of the HFT community to support the alternative MTFs. Ironically the BME holds the key because unless the HFT community can lay off their alternative market making risk on the main market Spain will remain unattractive to them.
There may be a good strategic reason, however, for Spain to open up its market that has nothing to do with avoiding the wrath of the European regulators. Spain is uniquely positioned in Europe as many of it banks and brokers have technical and cultural connections to Latin America. The Latin American markets are typified by growth and levels of trading activity that far outstrip those we are seeing in Europe. Many institutional and retail buy-sides would like to get access to LatAm markets but the current isolationist approach makes Spain hard to deal with. If the BME were to open up its markets and expand its Latibex operations then it might find it can position itself uniquely in Europe and avoid the inevitable scrap that will take place between other European primary venues.
Anyway, it was a lively debate and so thanks to everyone who participated in making the event as successful as it was.