On the other hand, BATS and Chi-X were responsible for matching over 36% of the FTSE 100 last week (excluding non-lit trading such as OTC Dark Pools and SI). This would represent a sizeable pool of liquidity with which to continue the battle with the LSE. A combined entity would also have nearly 30% of the CAC 40 and DAX, too. With this sort of market share – and assuming it maintained its low cost base – the combined entity would surely have “crossed the chasm” into profitability and sustainability. It would also help cement Chi-X’s claim to be the “largest pan-European equities exchange”.

As the LSE, Deutsche Börse and NYSE Euronext continue to prepare for greater competition between themselves, they too may be dragged into bidding for Chi-X and BATS. Were this to happen, we would almost be back to square one in the merry MiFID game because they would then have bought back nearly all the liquidity that their members had siphoned away onto alternative platforms.

Meanwhile, I am in Tokyo this week debating the future of fragmentation here since last month’s launch of Chi-X Japan (incidentally owned by Chi-X Global not Chi-X Europe). Obviously it’s very early days and there are still some regulatory obstacles to overcome before the playing field is level (such as allowing the PTSs the same short selling privileges that the Tokyo Stock Exchange enjoys). Nevertheless, interest in what Chi-X Japan and others (including SBI Japannext and kabu.com) are doing is huge and we are already seeing a number of brokerage firms claiming significant price improvements by utilising SOR technology.

Unlike Europe there is no MiFID-style mandate for best execution in that region and so market forces will be free to shape the relationship between the sell-side and the buy-side. Many market participants, however, are looking to leverage their technology investment in fragmentation from other geographies here too. It will be interesting to see how quickly these fragmentation tools are deployed in Japan (and the rest of Asia) and compare what happens with other countries around the world.

The problem is that without clear, timely and complete execution data it’s difficult for the buy-side to understand liquidity patterns and evaluate execution quality properly. This goes right to the heart of MiFID’s original objective as it’s pretty difficult to demonstrate best execution if you can’t measure it accurately. This was tricky enough pre-MiFID but is made harder still by the fact that the multitude of new venues that have emerged since November 2007 all unilaterally created their own (often conflicting) acronyms for describing different trade types.

The intriguing possibility was raised that maybe FPL themselves could play a role in trying to agree a common set of standards for the production of such a tape. Once the rules were agreed then it could be left to market forces to allow different firms to create and market their own products. FPL represents a very well respected professional body that has done a great job in developing and disseminating the FIX Protocol across the finance industry. And, crucially, it is one of the few organisations that is consistently able to get market participants to set aside their own vested interests for the greater good of the industry.

It’s an important issue because if we can’t sort this out for ourselves, then CESR will come along and take our toys away completely and impose a utility based Mandated Consolidated Tape (MCT) as we have in the US. If CESR does go down this route then it’s hard to see how the whole thing wouldn’t be hijacked by all the different political interests of Europe’s member countries which would be to the detriment of everyone.

Anyway, have your say:

And, if you have a better idea, we’d love to hear it!

The chart below shows the LSE’s market share of the FTSE 100 in the first 6 months of this year (to be fair, I have also included the lit and dark volume from Turquoise which it acquired at the end of last year). Also included in the graph are the total FTSE 100 shares traded by both volume and value over the same period. As you can see the LSE’s market share of its benchmark index seems to be flattening out and possibly even coming back a little bit.

This is in stark contrast to the same period last year when its market share plummeted by nearly 20 percentage points.

So, should we expect the bells to be ringing in Paternoster Square as the LSE celebrates having fought off the competition from those pesky MTFs? Well, yes and no. Obviously it’s good news that its market share of the FTSE 100 is getting stickier but over half the entrants in Europe’s top twenty most fragmented stocks are actually now FTSE 250 companies. This shows just how ubiquitous the whole fragmentation process has now become. And, just like other primary market centres, the LSE is also under pressure over market data fees and the possibility that CESR may impose a Mandated Consolidated Tape (MCT). If this follows the US model, then all venues will contribute to the cost, and share in the subsequent revenues, equally. This is good news if you’re a newcomer to the party but not so good if you’ve always enjoyed the lion’s share of the market data revenue cake.

The other dimension to all this is what happens in Europe as a whole. This point was well made by Alasdair Haynes in the Missoni Tapes which you can download here. Alasdair makes the very valid point that the pan-European picture is becoming increasingly important as the next front in the battle for liquidity. A quick look at Switzerland’s SMI index or Stockholm’s OMX S30 index only goes to reinforce this point.

Nevertheless, the LSE should be congratulated on the vigour with which it has responded to the challenges it faced, and it will be interesting to see how the chart looks in the first 6 months of 2011 once it has it shiny new Millennium Exchange matching technology in place.

The chart below also shows how well Turquoise has been doing in terms of growing its dark volumes:

Turquoise was quick to capitalise on market concerns in June that some high speed data feeds from other venues potentially included price sensitive information. Irrespective of whether this was true or not, Turquoise did a good job in seizing the marketing high ground by confirming the veracity of its own feed.

Another winner is Nomura NX which has set the standard for broker-owned dark pool reporting. By registering NX as an MTF, users can be absolutely sure of the true depth of liquidity they can expect and the type of participants they’ll be sharing the water with. Other banks look set to follow Nomura’s lead and register their dark pools as MTFs too but, in the meantime, we will have to make do with the combined disclosure in the BCS reports from Markit. These show the combined volume of six bank-owned dark pools at around €5 billion per month.

So, it looks like the art of growing a successful dark pool is a combination of factors: leveraging your distribution; providing real post-trade transparency; and effective marketing.

None of this helps the buy-side, however, which has to search harder and harder to find tradable chunks of dark liquidity amongst a growing number of alternatives. And, without the same level of post-trade transparency for all non-lit venues, this situation only looks set to continue.

Take a look at the FFI for Big Yellow Group, a FTSE 250 stock, for the week ending 18 June:

Despite the fact that its FFI is above 2 it was actually only the 50th most fragmented stock in the FTSE 250 last week. This shows just how deep the impact of fragmentation has become and how it has gone way beyond the blue chip stocks that it all began with and is now affecting even those stocks with relatively low turnover.

Dig a little deeper and the Fragulator shows an even more interesting picture.

In that same week, just under 60% was traded on lit venues whilst the rest was spread over dark MTFs, Systematic Internalisers and OTC trading. However, the average trade size between the dark MTFs and the lit venues was almost identical and so you have to wonder, at least in this case, whether the extra cost and hassle of routing to the dark books was actually worth it. When you consider that the seven dark books concerned accounted for less than 7% of that week’s volume you start to wonder whether the best execution imperative is all going a bit too far.

This seems to be especially the case for the buy-side, many of whom prefer to deal in chunky blocks rather than have their orders diced into smaller and smaller pieces and sent spinning round lit and dark platforms in search of a partner.

This extra confusion means that the buy-side has to work harder and harder to form a view as to how stocks are really trading so as to make sure that they are being effective. This makes it difficult to select the right broker and to assess their executional effectiveness.

Maybe what we need is a concept of “good enough” execution as the extra cost and complexity involved in going for “best” is making it harder and harder to achieve.

Mark Hemsley, CEO of BATS Europe, confirmed that this price promotion is scheduled to run for at least the next two months and pointed out that it’s a lower access fee than the current pricing offered by the LSE and is irrespective of order volume.

BATS is betting that it has enough liquidity already to interact with this new flow and so will not have to onward route to the LSE too often. Certainly BATS has been successful with similar promotions in the past as some of the new flow it attracts will stick even when the price incentive is removed. So, if BATS+ Primary does work then maybe NYSE Euronext and Deutsche Börse should watch out too.

The idea of market centres onward routing flow that they can’t match is standard practice in the US where Reg NMS compels venues to route to other destinations offering a better price. This is in contrast to MiFID which allows the concept of best execution to be interpreted in a wide variety of ways by different market participants. The fact that, in Europe, brokers and venues both offer smart or onward routing services shows just how confused the whole situation is becoming. This is especially true as more and more large brokers wade into the venue space and register their own dark matching facilities as MTFs with the FSA. Unlike Reg NMS, however, MiFID’s principle-based approach doesn’t offer much help in all this. Maybe what we need are much clearer definitions as to how participants compete for the Liquidity World Cup.

The reaction from Paternoster Square will be interesting, too – will the LSE adjust its pricing (again) or tough it out until its new low latency Millennium Exchange platform is up and running?

Either way, whilst we debate the merits of omitting Theo Walcott from the final squad and argue over likely England formations, it looks like we will have to keep an eye on BATS’ market share too.

Finally, on the subject of prizes, thanks to the folks at Inside Market Data for judging the Fragulator® the ‘Most Innovative Market Data Project’ at their awards ceremony in New York last week. Let’s just hope that the summer sees even more silverware return to London!

Also, the published numbers represent only a fraction of the total non-lit volumes being reported across dark MTFs, OTC trades and Systematic Internalisers. Take the FTSE 100, for example. Last month 66% of its constituents were traded on various lit venues including, of course, the LSE, Chi-X and BATS Europe etc. The remainder was split across registered dark MTFs such as Chi-Delta and Nomura NX, bilateral OTC trading and Systematic Internalisers. Just to be absolutely clear, however, nobody is suggesting that a third of the FTSE 100 last month was traded on broker dark pools but what is certain is that it wasn’t traded on lit venues either. While the new Markit report provides some useful additional data, the only way to get a completely accurate figure is to deduct the Markit numbers from the OTC and SI reports, add back in the registered dark MTFs and then make a guess as to what is missing.

Another point that was made to me is that it is still not possible to get an accurate, independent figure for broker dark pool trading in a particular stock or index as the Markit report only provides a combined number of some broker dark pool trades in each country in Europe.

Markit can only publish the information they are given but, until the industry as a whole unites behind a common methodology and approach, it looks like we will remain somewhat in the dark about the dark.

On this point, the chaps back at the lab have now added the EURO STOXX 50 Index into the Fragulator (thanks to Malcolm Ford for his useful suggestion on this). If this is any kind of proxy as to how other national indices are going to end up then life is going to get a lot more complicated for us all. I started trying to add up all the different potential paths an order might take (including clearing and settlement) over the 35 different venues but soon gave up – might make a good idea for a competition?

Anyway, it was a great event in Copenhagen and the tour and dinner at the nearby Carlsberg Brewery proved an ideal opportunity to refresh ourselves on a similarly dazzling array of liquidity.

It didn’t help that NEURO launched at the height (depth) of the credit crisis, but it always seemed to struggle to develop a real identity of its own. Chi-X was first and Turquoise had a bunch of investment banks priming it with liquidity whilst BATS has always picked its fights carefully and punched effectively above its weight. So what’s next?

Fragmentation continues on the same trajectory – upwards – and, it seems, is spreading to new areas too. On this point, I was at an event organised by Goodacre and APCIMS on Monday where Citadel’s Matteo Cassina and Equiduct’s Peter Randall were extolling the virtues of their MTF in the RSP space. This struck me as a good example of what it’s all about. Equiduct enables Citadel to bring its very efficient market making to bear on retail order flow. This narrows spreads which is good for best execution but challenges the existing RSP market makers.

The same is true for the mainstream MTFs as they enabled other HFT market makers to step to the front of the queue for institutional flow in a very similar way. Sadly NEURO seemed unable to attract these sorts of players and so was unable to build enough momentum to gatecrash the fragmentation party.

Anyway, I know that NEURO’s CEO Charlotte Crosswell and her team are both talented and dedicated so I’m sure they will make their presence felt as the liquidity war intensifies.

Last week also saw the LSE Group introduce a revised pricing scheme that aims to support the HFT community. BATS moved quickly to try and shoot holes in this by pointing out that it was only a few months ago that the LSE ditched a similar scheme in favour of the wholesale trading community. Whilst BATS may well have a point, it seems to me that every business is perfectly entitled to amend and change its business model as it sees fit. In fact, the LSE was often criticised in the past for not moving quickly enough in terms of introducing new initiatives or reacting to market changes. Now that it is prepared to be a more nimble player, it becomes a far more formidable participant in the battle for European liquidity.

A quick look at the Fragulator, however, shows just how high the stakes are. Prudential and A. B. Food were the two most fragmented FTSE 100 stocks last week.

Market Share by Venue – A.B. Food (week ending 23 April)

More interesting still is the fact that nearly 5% of A.B. Food stocks were traded on dark venues last week. The importance of effectively navigating dark liquidity was made by Instinet’s own Richard Balarkas during his TradeTech presentation. This is particularly important because, counter to what the chaps at MiFID would have you believe, the difference in order size between lit and dark trade sizes isn’t actually that great (the average trade size for A.B Food last week was 510 for lit and 651 for dark). What this means is that the interaction of lit and dark trading is going to become a key stronghold as both types of venue seem to be covering pretty much the same territory in terms of order size.

Whatever the outcome, the events of last week were a good example of the old axiom that all’s fair in love, war and liquidity.