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The Croissant Hypothesis

It was interesting to read Jeremy Grant’s piece in today’s FT about the outage at NYSE Euronext yesterday. Somewhat counter-intuitively volume didn’t move to the MTFs but, according to Jeremy, traders simply “munched on their croissants” whilst the techs fixed the problem. This outage highlighted again the difference between the US and Europe where US volumes are much more evenly spread between venues. What this means is that traders are far less dependent upon the concept of a “primary” exchange for a reference price. Some argue that this is the fault of the smart order routing (SOR) technology as it is unable to kick off its decision-making logic without first receiving a reference price from a primary exchange. Others say that the lack of a US style consolidated tape is the culprit. Both of these points are true but the real problem is that market sentiment still seems to favour doing nothing if the primary market is down. In a similar fashion, most SOR technology will favour the primary venue over MTFs when that market is in its auction phase as this is the behaviour that market participants want. So, it would seem that the challenge for MTFs is not to get technology vendors to make their SOR kit work differently, but to get the wider trading community to be more accepting of using their platforms when the primary market is down. As fragmentation continues to rise across Europe the whole idea of a primary market will increasingly be called into question and it will be interesting to see when and where the tipping point for this really is.

Anyway back to croissants, looking forward to TradeTech Paris this week. Please come by the Fidessa stand (no. 46) for a chat if any of you are going to be there too.

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