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MTF Price War Hots Up 2

Interesting to read Jeremy Grant’s piece in the FT today about the LSE charging 1 basis point on any trade that arrives from an external trading venue such as Nasdaq OM Europe. This will also apply to BATS Europe and other MTFs when they make similar onward routing services available from their platforms next year.

Nasdaq has previously branded this move by the LSE as uncompetitive, but Nasdaq’s own aggressive price model (launched last week) was criticised by the other MTFs as uncompetitive too. It seems to me that as the first shots are fired in the fragmentation war, price seems to be the ammunition that comes most readily to hand.

The LSE’s decision to charge the new venues shows that it is concerned about liquidity leaving the LSE. The fact that the FFI of the FTSE 100 (on Friday it was 1.55) is generally higher than for any other traditional index shows that it is right to be worried. By offering to onward route orders that don’t match on their platform, new venues (such as Nasdaq OM) make themselves more appealing to traders who then don’t have to worry about deciding which venue to visit. The idea is that by attracting more order flow onto their platform first, the newer venues build liquidity and therefore the need to onward route flow becomes less and less. In my view, the LSE is completely entitled to charge its competitors for trying to step in front of its order flow in this way, but I wonder if a better press release might have highlighted the dependence that these new venues currently still have on the LSE in terms of liquidity, prices and symbology.

For their part, the new venues need to find areas other than pure price to compete on and need to work on the priciple of “my enemy’s enemy is my friend” in the marketplace especially as the new landscape is only just beginning to transform.

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