Kee-Meng, how did the LSE outage affect you? How do you think this will affect the MTF community in the future?
I think there was minor impact in terms of our business because we continued to trade on the MTFs. As time goes on I think the MTFs will continue to gain significantly more credibility as well. While trading continued on the MTFs certainly, volumes and spreads were lower and wider. The first time the LSE went down, people didn't know how to handle it, but this time around there were people, including ourselves, who had since the last outage, reprogrammed their systems to be able to continue to trade when the primaries went down. I suspect there were not as many firms as the MTFs would have liked, with technology in this area still lagging at the moment.
People are free to take their orders and trade them elsewhere but in many cases it is their SORs which are probably not configured to do that. The truth is this is not just an LSE issue. We are talking about the LSE because they experienced the most recent significant outage within the primary exchanges. The real question here is "to what extent have the MTFs become an alternative source of price discovery to the primary exchanges". It is only when the primaries "fail" that we really start to analyze this.
Should the LSE have put the market into an Auction? Is it down to the LSE to accept more responsibility for this kind of move, or should people be reprogramming their SORs to cope with this scenario?
The LSE putting the market into an auction was probably a clever move for them to lock up the flow. Everybody, including us, thought that if a market is in auction, it may begin trading again imminently. The truth is that the LSE had no idea when it was going to be back up.
While some SORs continued to get a price feed from the LSE, they continued to await activity figuring it was like, for example, a volatility auction. They thought uncrossing would occur imminently. I know some MTFs think that the LSE should have just shut down and perhaps they should have but I don't have a strong opinion either way because from our perspective we could still trade.
It's going to be a combination of both the LSE taking a
little bit more responsibility for such situations, shutting down
until they know what is going on, as well as firms programming
their smart order routing to actually start handling conditions
such as these. Some firms were under the impression that the
exchange was going to open shortly and did not bother routing
their flow elsewhere. If the LSE was clearly shut, you may have
seen more volume flow to the MTFs.
Is this a sign of things to come in terms of the perception of MTFs? Have they moved beyond the simple role of an arbitrage venue? Is the LSE not the only price discovery source?
Yes I think so. If you look at the LSE volume on December 1st 2009, they were trading close to 54%. You can't possibly say that half the volume is going to be price determining. We'll see this happening more and more as other primary exchanges also continue to lose market share.
How soon do you expect the trading community to react to these outages?
The LSE has been down three times this year. Many firms have already built in contingencies with regards to this. Others will soon follow. We will certainly continue to optimize our systems to ensure that we can cut over and continue to trade on the MTFs as effectively as possible for our market making and our client businesses.
The trading community seems to be gaining more confidence in the MTFs. Would you agree with that?
Yes totally. We have always felt pretty comfortable trading on alternative venues based on our background from the US where we are also very active on all the other venues. Unfortunately for the LSE, the UK market is much more open and receptive to changes and competition so they have become the whipping boy, so to speak. The other markets like Euronext and Germany are significantly more protectionist so they have lost less share but I am pretty confident that further loss of market share for these markets is not far behind.