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The Big Bang Theory

A number of separate announcements caught my eye this week. The first was the announcement that Turquoise is to cut its trading fees (Turquoise announces enhanced rebate programme). Of course, the promise of lower fees was the poster child for MTFs when they launched last year, but I wonder what the “right” price for providing a market to trade shares should be. NASDAQ OMX Europe was criticised last year for offering a net zero pricing model to attract volume to its platform. The fact that Turquoise has joined the price war too shows just how competitive this year is going to be. With new MTFs still to launch, being low cost and relatively easy to set up may turn out to be a double-edged sword in terms of competitive advantage.

At the other end of the scale, NYSE Euronext announced that its dark pool had received FSA approval (SmartPool Receives FSA Approval to Begin Trading on February 2, 2009). NYSE Euronext looks to be covering all the bases with both dark and lit MTFs, together with its primary exchange. Exactly how they will all interoperate isn’t completely clear but doubtless NYSE Euronext will seek to leverage its product diversity and distribution across all three platforms.

These announcements from NASDAQ OMX (NASDAQ OMX and Nordic Securities Association Agree on the Implementation of Central Counterparty Clearing) and Euroclear (Euroclear shakes up management) may be the most significant.

One the biggest headaches for everyone in this fragmented world is the multitude of clearing and settlement regimes in operation across Europe. This creates extra cost and complexity for everyone involved in the trading process and, despite the regulator’s encouragement, it looks unlikely that a complete cross-border clearing regime will appear any time soon without a further nudge or two.

A journalist asked me yesterday whether fragmentation was here to stay. While the answer seems to be an emphatic yes, the final form is far from decided. It’s a bit like watching the elements reform themselves after the Big Bang created by MiFID. The announcements this week are the first signs of how this new universe may look as the different players combine in new ways to siphon liquidity out of the cosmic soup created since MiFID’s introduction.

Anyway, back on planet Earth, and after much debate, we have decided to publish the FFI using weekly (as opposed to daily) stats. The effect of this is that we smooth out the graphs, thereby making it easier to see trends, and that we can show the data over a greater length of time. You can see this effect below – please let me know whether you think this is an improvement:

New weekly view

Existing daily view

We also plan to publish a Fidessa “Top of the Pops” style list of the most fragmented stocks (complete with last week’s position/new entry info as well). Thanks to Nigel McGee from MF Global, and others, for this suggestion.

Finally, we still haven’t yet reached a consensus on how to measure and show dark liquidity. There would seem to be three categories of dark venues: dark MTFs, like NYFIX Euro Millennium; exchange sponsored initiatives, such as LSE/Baikal; and the SI activities of brokers, such as MLXN from Merrill Lynch. Each category operates differently in terms of regulation, reporting, pricing and market profile. Not sure if we should report these separately or lump them all into one category of dark.

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