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Be careful what you wish for

It was great to see the success last week of the new “inverted” pricing model at BATS Europe. As a result, BATS weighed in with 6% of the CAC 40 and just over 4% of the DAX. Other MTFs were successful in Europe too and so, in just a week, the FFI of the CAC 40 and the DAX rose by 6% and 10% respectively and both have now reached convergence with what is happening in London. Also, for the first time, all of the top twenty most fragmented stocks had an FFI of 2 or above.

Life looks good for the newcomers, then, although I’m not sure it’s necessarily all one way traffic. John Wilson (Baikal’s CEO) summed it up at last week’s Exchange Forum event in London where he talked about the “different sorts” of liquidity venues were competing for. According to John different types of liquidity will have different levels of affinity to specific venues. I guess the point he was making is that there is a distinction between attracting market share through deep discounting and really shifting liquidity permanently from one venue to another.

According to the guys at BATS, though, when they tried the same pricing promotion in the US at the beginning of 2007 it really did succeed in producing a permanent shift in liquidity. I think this highlights the point that discounting is a great way to get people into your store but the products on your shelves still have to be good to ensure that people continue to shop with you when the discount period ends.

In any event market share is, perhaps, just vanity as what really counts is actually making money (a point well made by the FT’s Jeremy Grant at the same event). The primary and alternative venues are on different trajectories in terms of revenue/cost projections and each of the MTFs will attest to the deepness of their investors’ pockets. This looks likely to be put to the test as the current trend towards deep discounting to attract liquidity continues.

Only when “normal” pricing has been resumed for a while will we be able to tell which sorts of liquidity are naturally aligned with which venues.

Meanwhile traders are basking in lower and lower trading costs but, if they don’t let the new venues make a reasonable return, they may find that there are fewer left to choose from.

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