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The 5% Theory

Interesting piece from Jeremy in the FT yesterday – LSE claims quickest trading speed – that describes the new low latency platform that went live on the LSE’s Turquoise MTF last week. Whilst Xavier is encouraging us all to admire the new go faster stripes on the platform, he also needs to worry about the fact that any alternative venue needs volume as well as low latency (and low trading costs). On this point at least, last week was not the best for Turquoise. It’s volume for the week fell and its market share of all the major indices was lower than it has been for a number of months.

This may be down to teething problems with the tech or in getting the broker community to understand the new platform’s true capability but, either way, it will be interesting to see how the momentum re-builds around the new Turquoise platform.

The other issue that the article highlights is the mythology surrounding numbers that are quoted on venue latency. Without a single reliable and unbiased metric it is pretty much impossible to compare the competing claims between all the different venues – single numbers are just meaningless as they don’t define what is being measured, the loading of the system, the standard deviation or the level of trading activity going on at the same time.

I am sure that other venues will come out with their own numbers to compare with the 124 microseconds quoted for Turquoise, but the real issue is how a venue performs in real life through whatever pipes you are are using to access it. For many, the most important metric is how quickly you receive confirmation that your order cannot be filled as this then allows you to go onto the next venue.

A different way to measure and compare alternative platforms is the 5% theory. What seems to happen is that once a venue has achieved around 5% market share in a stock or index it becomes “relevant” and the Smart Routers have to include that venue in any best ex algorithm. This has the effect of increasing volume again. Another threshold is 10% where, again, venues reach another level of significance, especially in the eyes of buy side market participants who simply cannot afford to ignore any such venue. A good example of this is Burgundy which, in the case of Stockholm’s S30, has breached the first magic 5% level. Anyway, it will be interesting to see how Burgundy builds momentum around this important bridgehead too.

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