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Trading Places

Few can have missed the news that Peter Randall will be leaving Chi-X. Whatever the reasons for his departure, Peter has proven that it really is possible to break the mould in our industry and he should be credited with this achievement. He has always been able to talk about MiFID and fragmentation in an entertaining way and backs up his colourful analogies with hard statistics. Given that Chi-X has been one of the most successful MTFs so far, it’s curious to read that he will moving on, especially as the MTF community looks to be facing a pretty challenging twelve months. More alternative venues are set to launch this year (such as Quote MTF, Liquidnet H20) and, of course, the primary exchanges will be weighing in with their own MTFs too. All of this is set against a backdrop of declining overall trading volumes.

I also saw that Stuart Rutherford will be joining NASDAQ OMX Europe as Head of Sales. This prompted me to look at the relative positions of BATS and NASDAQ OMX which both launched at about the same time.

There could be all sorts of reasons for NASDAQ’s slower start but it does seem that BATS has worked very hard to get the right mix of order flow. What MTFs need is liquidity makers and takers, as market makers soon get bored of trading against each other. It’s a bit like an ecosystem – sharks don’t feed off each other but instead eat medium sized fish which in turn feed on smaller fish and so on. In order to get a high rate of matched flow (as opposed to orders that just pass through the venue) you need the right number and blend of participants.

Looking at the top twenty most fragmented stocks this week – we have a new entry at number one – Smiths Group, with an FFI of 2.28. While the volumes traded weren’t that high, Turquoise grabbed over 30% of the liquidity in this stock, comfortably beating Chi-X into second place with 9.5%. It might be useful to analyse trading further in this way to try and understand which types of stocks are fragmenting the most and why. I’ll ask the guys back at the lab to have a look and publish the results. This would enable all the alternative venues to target their marketing activities with even more precision and, at the same time, enable the primary venues to see where they are most vulnerable.

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