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Making Sense of Fragmentation

Welcome to the world of fragmented liquidity.

18 months ago few of us realised just how disruptive MiFID was going to be on the structure of financial markets.  This site aims to provide a forum to understand these changes and provide an evolving consensus within the Fidessa community on the impact of current changes.  It will also look forward to the next wave of changes and assess their impact on the community at large, on trading styles and on the use and adoption of technology.

At the heart of this initiative was the creation of the Fidessa Fragmentation Index (FFI).  For a technical understanding of how this is calculated look under the FFI background section of the site, but the basic idea is to provide a simple, unbiased view of how different stocks are fragmenting between primary and alternative venues.  Basically the FFI provides a single number that shows the average number of venues you will need to visit in order to complete an order.  So an Index of 1 means that the stock is still traded at one venue.  Once the index goes above 1 then it shows that that any order for that stock will more than likely need to be traded on a second venue to complete.  Once an stock hits an FFI of 2 or above then basically it’s been fragged and it no longer “belongs” to its originating venue.

What’s neat is that the FFI reflects the true state of fragmentation. So, for example, consider a stock where 80% is traded on a primary venue and the other 20% is split equally between two alternatives.  This stock will have a higher FFI than one that is split 80% on the primary and 20% on just one alternative venue.

Right now, we calculate the FFI across all the constituents of the major European indices FTSE, CAC 40 etc.  A full list of the stocks and indices covered is available on the site together with a list of those stocks that have fragmented most over the past few months.  What surprised us was just how many stocks are already fragged and the rate at which the FTSE is fragmenting (the current FFI for the FTSE 100 is around 1.7).

This is fuelling the debate over de-coupling market prices from primary exchanges and has spurred the new MTFs to create reference prices that are independent.

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