Few can have missed the announcement this week that the LSE’s new low latency platform, Millennium Exchange, will be up and running in September. This comes just months after its acquisition of the Sri Lankan firm, Millennium IT, which supplies the technology and is testimony to the new thinking now taking place at the LSE. The same news item also mentions that the LSE has adopted a “self certification procedure” for the transition which will place the onus on the trading community to ready itself for the new platform. This is a canny move by the LSE as it enables them to regain the initiative and, at the same time, set the agenda for its members and technology partners. This is because both will need to focus on ensuring an orderly transition to the new platform between now and the go-live date.
Jeremy Grant’s article on FT Trading Room earlier this week highlights what all the fuss is about: latency and the growing number of High Frequency Traders who supply more and more of the liquidity in today’s markets. Whilst we can all debate whether the HFT phenomenon is a good or a bad thing, they are most definitely here to stay and have been a fundamental force in fragmenting liquidity both in the US and in Europe. Now that Tokyo has joined the low latency debate with the TSE’s new arrowhead platform it will be interesting to see if this ignites the fragmentation fuse in Asia too.
This headlong rush to low latency must of course be accompanied by due consideration for resilience and failover. Most technologists agree that there is a basic trade-off between speed and resilience - the faster you go the harder it is to put the car back on the track if something goes wrong. In the US, this is much less of an issue as the rest of the market provides resilience in the event of a glitch at any one venue. As we have seen in Europe, however, the lack of a consolidated tape and other factors mean that trading seems to simply stop in the event of an outage at a primary exchange.
On this point, it was interesting to see the results of our own poll on how best to solve the current issues surrounding the lack of a European consolidated tape. 60% favoured a collaborative approach as opposed to more regulation. With the stakes so high, and so many vested interests, it will be a great achievement if we can solve these issues ourselves without more “help” from the regulators.
February 5th, 2010 |
Comment
Looks like it’s Ireland’s turn to run the gauntlet with the MTF community. Pretty much all the MTFs - Chi-X, BATS, NASDAQ OMX Europe and Turquoise - have announced that they will be trading Irish stocks from now on. For this reason we have now included the Irish Stock Exchange (ISE) and its accompanying index (ISEQ) on the FFI website. A quick look revealed that many Irish stocks are in fact traded on the LSE and so Dublin’s market share of its main index is less than 30 percent already.
This is a good pointer to the decoupling that is occurring between indices and their parent exchanges. In Dublin’s case it’s got nothing to do with MiFID but the simple fact that the LSE is the bigger marketplace for some of the large cap Irish stocks (which make up the ISEQ index). For other indices, such as the FTSE 100, the CAC 40 and the DAX, we are slowly but surely seeing them decouple from their parent exchanges and start to exist in their own right. The more this continues to happen, the happier the MTFs will be as this helps to break apart the concept that any given stock or index should “belong” to a specific exchange in terms of trading.
As this process continues, country-specific indices may become less relevant as we are all increasingly forced to adopt a more pan-European perspective. In time the S&P Europe 350, the FTSE Developed Europe Ex UK Index or sector-specific indices like the Dow Jones EURO STOXX® Telecommunications index may well become more relevant than the current crop of country-specific indicators.
I guess when this has happened you could say that MiFID will have done its job in terms of breaking down the national monopolies in equities trading across Europe.
Is it all over for Dublin as far as keeping hold of its current market share of ISEQ stocks? So far it’s too early to tell and, of course, there is nothing to stop the ISE reinventing itself as a pan-European venue and taking on the MTFs at their own game.
January 27th, 2010 |
1 Comment
It was interesting to watch Andrew Bowley’s video interview on Finextra regarding the launch of Nomura’s dark pool - NX. It helped crystallise the love/hate relationship between dark pools and the T word - Transparency.
Andrew Bowley made a good point about how the pursuit of MTF status for NX had been going on for a long time and wasn’t just a knee jerk reaction to the increasing regulatory pressure on the dark pool phenomenon. He also talked about how greater transparency was a good form of advertising for his brand and would help attract customers. This would seem to be the case, too, for Instinet’s dark pool - BlockMatch - which went down a similar MTF route. Other dark pool operators don’t quite share Andrew’s view on transparency although this is a function of their diversity rather than any attempt to be necessarily opaque. On both sides of the Atlantic there is a wide array of activities being labelled dark pools, all of them offering different services aimed at different market sectors. In the US, for example, dark pools operated by GETCO and Knight are market maker dark pools where the pool operator is always taking the other side of the trade. Others, like Liquidnet, are buy-side only crossing networks. In yet another category are the venue operated pools such as Chi-Vision or the LSE’s Turquoise (nee Baikal) that offer aggregation services by providing dark SOR connectivity to other dark pools. And, finally, there are the broker-owned dark pools such as SigmaX (Goldman Sachs) and Crossfinder (Credit Suisse). This is what is causing the regulators such a headache as it’s impossible to regulate effectively in such a diverse environment.
This is all part of a wider transparency issue in Europe that revolves around the lack of agreed standards for pre- and post-trade market data. I have commented a few times that an industry derived solution would be better than anything imposed from above. This, however, requires that industry players adopt a grown-up approach and collaborate when perhaps their instinct is to try and compete. With this in mind, it was interesting to read the European Data Consolidation paper sent to me by Andrew Allwright at Thomson Reuters. While it naturally has a Reuters sales bias it does succinctly highlight the issues and make a number of sensible recommendations that could form the basis of a long term solution. I’m not sure that all the proposals outlined will work in practice but this is a community problem and I believe we should be working together to resolve it. Naturally it will require some discussions about the detail.
Anyway, this seems like a good time for another “ask the audience” moment.
Loading ...
January 20th, 2010 |
Comment
Looks like 2010 is going to be a pretty interesting year in the battle for liquidity between the established exchanges and the more recently established MTFs and dark pools. It also looks like fragmentation fever is likely to spread eastward, too. This is being driven by a number of factors that include technology, regulation and commercial opportunism. The introduction this week of arrowhead by the Tokyo Stock Exchange will bring the performance of the TSE more in line with global standards and so open the door for the High Frequency community and brokers that can exploit microsecond price movements. This, in turn, will encourage the growth and use of PTSs (the Japanese equivalent of America’s ATSs or Europe’s MTFs). Currently PTSs only account for a fraction of Japanese equity order flow but the ability to arbitrage between them and the TSE may well provide the stimulus the market needs.
Meanwhile, the regulatory picture in Australia is set to change now that the Australian Securities and Investments Commission will have the ability to grant new exchange licences. This will open up its domestic market to other competitors and so allow Chi-X Australia, AXE and other alternative venues a realistic shot at gaining market share. Given that trading volumes are smaller than in Europe or the US, however, it will be interesting to see how much fragmentation the domestic Australian market can take and it would seem that any alternative venues will need to attract flow from other Asia Pacific countries in order to be truly viable.
The Singapore Exchange and Chi-X Global have joined forces to create the first exchange-backed dark pool in the Asia-Pacific region which will compete with the global dark pools already operated by the big banks. Put all these things together and they might be enough to set off a wave of fragmentation in that region. As we’ve seen in the US and Europe, once the change happens there’s no going back. Countered against this, of course, is the argument that without a single regulatory mandate for change across the whole region, the domestic incumbents should be able to fight off the newcomers one by one. This was certainly the case in Europe pre-MiFID where a number of well constructed initiatives (anyone remember Jiway, for example?) failed to wrest liquidity away from the primaries without the help of a regulatory imperative behind them. On the other hand, maybe the events of the past few years in the US and Europe have changed the trading landscape forever and so it is simply a question of time before we see a similar, fragmented, situation across the Asia Pacific region. Perhaps the biggest driver for change, however, will come from the big banks and brokers themselves. Having invested such huge sums in SOR and dark pool technology they will be keen to leverage this investment every way they can.
January 6th, 2010 |
Comment
Now that everyone at Fidessa Towers is starting to wind down and prepare themselves for the Christmas break, I decided to look back at the predictions I made at the beginning of January 2009. As you can see from the table below, it looks like the FFI is a pretty good predictor of trends.
If the 2010 predictions are accurate you can expect the LSE’s market share in lit trading of FTSE 100 stocks to fall further from its current level of around 60% to something like 40% by the end of 2010 (excluding any volume from its imminent acquisition of Turquoise or from the revamped Baikal). It’s not all bad for the LSE, however, as it has finally acquired enough pieces on the board to take on both the MTF community and the other primary European markets too. Its widely anticipated acquisition of Turquoise will give it a pan-European MTF (already equipped with live order flow) right from the get-go and its decision to launch FTSE index derivatives will challenge the other primaries’ derivatives markets as well. Xavier Rolet should be applauded for getting the LSE to act quickly and let’s hope that his Christmas stocking is overflowing with the energy he’ll need to integrate such a wide array of different technology platforms through 2010.
This is in contrast to NYSE Euronext which has bet the ranch on its single UTP infrastructure. If you read the adverts, UTP allows the trading community to connect from anywhere and trade any asset class within its network. This will be great when it’s finally complete but NYSE Euronext will still need to prove that it can offer the best of all worlds rather than a compromise between everything. This is particularly true in the multi-asset space as the different nature of derivatives and equities trading make it pretty hard to tune one single engine to be best of breed at both. Meanwhile, Deutsche Börse has launched its own pan-European market (XIM) as its first foray in the battle for non-German liquidity in the equities space. Like the LSE, it will also be listing derivatives based on UK stocks. Looks like the big boys have worked out where the next battle is going to be fought. Unlike equities, however, derivatives contracts are created and owned by the exchanges that list them and so it’s much harder to wrestle liquidity away from the incumbent (NYSE Euronext Liffe).
Meanwhile, in MTF land, the prediction at the beginning of the year was that we would see the number of viable alternative platforms reduce to three. Over the past few months Chi-X, BATS Europe and Turquoise seem to have comfortably filled this space and trade between 15-20% of the FTSE 100 and other primary indices such as the CAC 40 and DAX. Assuming that Turquoise is acquired by the LSE then it looks like BATS and Chi-X will be left to fight it out in the alternative venue space together with NEURO (which is the only venue right now that also offers a smart routing service alongside its matching platform).
One of the predictions that didn’t seem so accurate concerned the impact of dark pools although, if the volume traded on dark pools matched anything like the column inches they receive, then perhaps things would be different. This point was made at a Dark Pools debate organised by the Centre for the Study of Financial Innovation on Tuesday where someone commented that if dark pools had been given a more benign name (e.g. Added Liquidity Venues) then maybe there would not be so much fuss about them amongst the media and regulators. This is true but only up to a point. Whilst the volumes in dark pools registered as MTFs are still modest there has been a significant (34%) upswing in other not-lit trading activity. This is where the regulators really need to focus since it’s increasingly difficult for anybody to see exactly how and where this liquidity is being traded.
Anyway, my thanks as always to the guys at Fidessa Labs for all their hard work this year and to everyone else who has participated in this site.
Happy Holidays - see you in January!
December 17th, 2009 |
1 Comment
Two events this week crystallised the need for better pre- and post-trade information.
Firstly, BATS joined ranks with Chi-X to question the LSE’s decision to set its market to auction mode during its recent outage.
In a related white paper on the subject BATS also claims that “it is questionable whether the market was orderly on the LSE given publication of data which did not represent legitimate trading interest or available liquidity”. It would be interesting to find out, therefore, why the LSE decided to put its market into auction this time rather than suspending it altogether (as it has when it has suffered previous outages). But, whatever the LSE’s motivations were, you only have to look at the widening gulf in fragmentation between the LSE and other European primaries to see how critical the battle for liquidity in London has now become.
The crucial issue, however, is agreeing a mechanism to provide the market with a pre-trade tape of prices that has an agreed “market outage protocol”, an agreed standard for deciding on fungibility, and a means of determining which venues to include or exclude from the tape. Without this it would seem that effective price formation when a primary market is down is still some way off. This is especially the case when there is uncertainty over if or when the primary market will reopen (a point that is acknowledged in the BATS white paper). Anyway, rather than deliberate on this, the guys at Fidessa Towers and I thought we would take the “ask the audience” option and allow you to make your views known to the trading community at large.
Loading ...
The second development was the announcement that Nomura is going to reclassify its dark pool (NX) as an MTF and adopt a more transparent approach to publishing post-trade information by publishing its trades to Markit BOAT. Whilst Nomura is to be applauded for playing the game, it’s still only a partial solution to the problem. Other broker dark pools, such as BlockMatch from Instinet, have taken the MTF high ground, too, but still report in a different way (BlockMatch trades are printed to the Chi-X OTC tape, for example). The net result is that it is still pretty hard for the chaps back at Fidessa labs to assign all these dark trades to the right categories. This point was highlighted by CESR chairman Eddy Wymeersch who commented in the FT Trading Room article “we have very contradictory figures with regard to dark pools”. Maybe I’ll ask Santa to put a Fragulator in his Christmas stocking.
A point that all venues (primaries, independent MTFs and broker dark pools) need to remember, however, is that it’s not actually their liquidity in the first place. Markets have always been about trying to bring together willing buyers and sellers in order to meet the needs of both. So, in reality, liquidity belongs to them and not to the venues. What we need, then, is a clear set of rules for both pre-trade price dispersal and post-trade reporting. Only then will the real liquidity owners (market traders) be able to get a fair deal out of MiFID.
December 10th, 2009 |
Comment
Few can have missed the furore over the LSE outage yesterday.
During the outage the MTFs made repeated attempts to convince the trading community that it should go and trade on them whilst the LSE was unavailable. The chart below, however, shows that they were pretty unsuccessful in this and that, instead, traders simply stayed away from the market altogether until trading resumed. This shows that, in London at least, traders are still reluctant to use MTFs without the comfort of knowing that the primary market is open at the same time. Market makers, too, are reluctant to make prices when the primary is down and so this further encouraged traders to stay at home rather than go and play on the MTFs.
Another factor in play this time, though, was technology. The majority of smart routers are (correctly) configured so as to direct all orders to a primary market when it is in auction. During yesterday’s glitch, however, the LSE put its market into auction which had the effect of creating an “artificial auction” that sucked up available liquidity from smart routers. This then led to the huge spike in trading on the LSE when it reopened at 2 pm. The net result was that LSE market share jumped by 7% compared with its daily average for the rest of November. This last point highlights, yet again, the ironic interplay in the post-MiFID world whereby the MTF community is still dependent on the LSE being open in order to try and increase its own share of UK stock trading.
Finally, as some of you may have guessed, it’s been “Clash week” here at Fidessa Towers. For those that don’t know, The Clash were pioneers of punk rock in London during the 70s. Their aim, together with other similar bands, was to disrupt the hegemony of the established music industry. Only time will tell whether the MTFs will be as successful in changing the face of European equities trading.
November 27th, 2009 |
4 Comments
There has been a lot of coverage of the LSE’s first half results this week. Most of the comment seems to focus on the erosion of its market share by the MTFs and whether the pricing of the MTFs is sustainable in the long term. Whilst there is little doubt that these are both valid areas for discussion, I wonder whether there are some more subtle issues involved.
Firstly, it’s not just about pricing per se but about pricing models. The MTFs have adopted maker/taker models that reward those traders posting liquidity on their platforms whilst charging those who remove it. This favours the Electronic Liquidity Providers at the expense of the large banks and brokers which generally prefer a wholesale discount pricing structure. The LSE has switched between both pricing models and, to date, neither approach seems to have stopped its market share from declining. Ironically, though, this is where the LSE (and other primaries) may have an advantage. This is because they can use the various MTFs they have built (or acquired) to separately meet the needs of these different market segments. In this way, they can create a range of sub-brands that can experiment simultaneously with different pricing/delivery models (how about trading FTSE 100 stocks in Euros, for example?). And, just like the high street supermarkets, shoppers benefit from the economies of scale regardless of whether they buy premium, regular or budget priced products.
Another point that maybe needs more emphasis concerns exactly who the enemy is. Maybe the real challenge for the LSE is less about protecting its UK market share from “troublesome MTFs” and more about establishing the LSE Group as a genuine European/global supermarket for stock and other financial instrument trading. Deutsche Börse’s creation of its international market (XIM) demonstrates where its own thinking is heading in this regard and, of course, NYSE Euronext has always made a big play about its pan-global, multi-asset credentials. The LSE, however, has a number of situational advantages in this battle, too - not least of which is the fact that London is generally seen as the financial trading capital of Europe. In addition, it has its acquisition of Borsa Italiana and its Canadian and Japanese connections to play on.
The MTFs face a similar dilemma. Is the enemy the primary exchanges or should they be vying instead to establish themselves as best alternative trading venue for Europe? Breathing down their necks are the ELPs and other market makers who have realised that, in the post-MiFID world, maybe they don’t need venues at all and can instead interact with order flow directly.
As the folks in Brussels start writing the script for MiFID 2 “where we went wrong and what we intend to do about it”, it looks like there is some doubt over what the right shaped entity for pan-European equities trading really is. Maybe the answer lies in the old axiom - keep your friends close and your enemies closer still.
November 26th, 2009 |
Comment
There was an interesting article in the FT yesterday about how IG Index (the spread betting company) will now be connecting to Chi-X and, I assume, other MTFs too. The story reminded me of how MiFID is starting to permeate outside the immediate professional trading community and enter the consciousness of the public at large. My own experiences in this area have been mixed - I bought a bunch of shares the other day and, on the spur of the moment, decided to ask my broker what his best execution policy was and which venues they had considered before executing my order. I was surprised and disappointed with the response. My broker had only the sketchiest knowledge of what best execution really meant and an even hazier grasp of the different venues that have sprung up since MiFID was introduced 2 years ago. Most alarming of all, they seemed almost resentful that someone had dared ask “the MiFID question”.
Besides making a mental note to find another broker, this experience set me thinking about how far MiFID has (or has not) affected the retail trading community across Europe. It depends where you look – Holland and, in particular, Amsterdam seems to have always enjoyed a thriving almost semi professional retail sector. Italy is similar, but the rest of Europe doesn’t have anything like as active a retail audience. This divergence explains why several months ago one of Europe’s largest liquidity providers - Optiver - set up a joint venture with Holland’s Binck Bank called The Order Machine or TOM for short. TOM dispenses with the need for an exchange altogether as it allows retail order flow to interact directly with Optiver’s market making capabilities to the benefit of both the retail trader and Optiver themselves. It will be interesting to see if this is just a Dutch phenomenon or a pointer to the future of equity trading across Europe. If it is the latter, then we may see this model replicated as other Liquidity Providers build or buy MTFs so as to interact with order flow in a similar fashion.
Another dimension to this issue is the level of understanding amongst corporate brokers and main board directors of exactly how (and where) the stock of the firms they represent is trading.
In the simple pre-MiFID days you need only to look at the trade feeds from the LSE or other primary exchanges to get a good idea of the on and off exchange activity in your stock. It’s pretty different now. Take Imperial Tobacco for example – 18 months ago the trading of this stock was split mainly between the LSE and Chi-X. Last week it traded on over 12 separate lit and dark venues and each of these achieved a different VWAP. Also interesting is the average trade size which, aside from Liquid Net, was broadly comparable between the lit and dark arenas. This is of more than just academic interest as this breakdown will influence which executing broker you use and, ultimately, what kind of price you should expect to pay or receive. (You can see this for yourselves if you log in and use the new forwards/backwards buttons on the Fragulator)
Anyway, next time you buy or sell shares, don’t forget to ask your broker the MiFID question.
November 18th, 2009 |
3 Comments
Those of you that have followed this blog know that I have commented a few times on the impact on fragmentation when a primary market has been unavailable (see the croissant hypothesis and the bacon roll theory). Well, yesterday it was the turn of SIX Group to run the experiment. Due to a technical glitch, SIX was unable to provide prices on major Swiss stocks for a few hours yesterday afternoon. A quick spin through the Fragulator shows some intriguing results that seem to counter the conclusions that were drawn before.
Total average volume of SMI stocks was around 111,000 trades on the 3 days prior to the problem. This fell by around 30% yesterday due to the outage, but the interesting bit is how the remaining volume traded. Chi-X, BATS, Turquoise and Nasdaq Europe all traded the same or greater volumes than they had previously despite the fact that the primary market was unavailable. This seems to counter the view that traders ignore a stock altogether when primary markets are down and, as a result, price formation happily took place between the MTFs only without the need for a “parent” exchange. What this shows is that, for Swiss stocks at least, the MTFs are now regarded as completely legitimate venues in terms of providing credible price formation even when the primary is down.
It’s not all going the MTFs way though, as further analysis shows that OTC trading increased by 46% yesterday when compared with the average of the three days before. OTC trading, therefore, was actually an even bigger winner than the MTF community as a result of the SIX outage.
The MTFs that find ways to attract this volume onto their own dark segments could be the liquidity winners of the future.
November 13th, 2009 |
Comment
