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First day back at school today – thought it might be a good (dangerous?) idea to try and make some predictions about what we will see in the world of fragmentation through 2009.

In the six months since we have been putting the numbers together, the FFI on the FTSE 100 has risen by 0.8 on the CAC 40 and by 0.3 on the DAX indices. Applying a strictly linear extrapolation of this means that we could expect to see the FTSE 100 break through the statistically significant level of 2.0 before the end of 2009. This would imply that any trader wishing to execute an order in any FTSE 100 stock would need to visit more than just the LSE to do so. The same analysis shows the DAX and CAC 40 following closely behind with predicted year end values of 1.87 and 1.69 respectively.

I suspect that these figures will prove pretty reliable, although the real question is where the liquidity will go to. I think it’s inevitable that there will be consolidation amongst lit MTFs and, whilst at least four more are scheduled to launch this year, I doubt that there will be more than 3 significant alternative venues by year end.

The real action is likely to occur in the dark/smart space. Baikal and Arca Europe will launch before the middle of the year and I’d be surprised if Turquoise is alone amongst the existing MTFs in trying to put together a strategy around dark liquidity.

Finally, I think the interaction between the large brokers with their own dark pools will also shape liquidity significantly this year. Perhaps they may end up as the real competition to the incumbent exchanges.

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