It was a record day yesterday here at Fidessa Towers as 1000s of people logged on to look at the stats on Turquoise now that the liquidity agreements with its institutional backers have expired. The drop off in volumes is significant but it is worth digging a little deeper into the true cause and impact.
Firstly, as Eli Lederman (Turquoise’s CEO) points out “it was an extraordinary commitment by 9 of the largest trading houses in Europe so, naturally, it would have an impact.” I’m surprised, therefore, that anyone is surprised that the volumes are lower. All execution venues (including MTFs and the primaries) have various incentive schemes in place – through share holdings, volume rebates or other preferential treatment – that are explicitly designed to encourage liquidity to flow onto their platforms. If any of these were removed overnight then these platforms too would see a drop off in their volumes.
The second point concerns where this “lost” liquidity has gone to. Looking at the stats, it’s not the other MTFs that have benefitted. BATS and Chi-X volumes have crept up marginally but so have volumes at the primaries. It seems that this liquidity has either been absorbed generally or, more likely, just been removed from the system altogether. The net result, though, is that fragmentation across Europe has gone down by around 10% in the last week. So, does this mean that the war is over? Again, it seems that the answer is more subtle. What it does show is that the interaction between those firms that sponsor venues and trade on them is complex and that nobody has got exactly the right business model in place yet.
As noted earlier on this blog, the battle for dark liquidity will represent the next phase of the fragmentation war. It is estimated that anywhere up to half of European stock trading is conducted away from lit centres of execution, either directly OTC or in the increasing number of dark pools sponsored by the brokers or the venues themselves.
This is giving the regulators a real headache as the MiFID rules are based around type of venue rather than style of trading. The trading community increasingly wants to interact simultaneously with dark and lit liquidity irrespective of where it resides. The refusal of venues to allow themselves to be categorised as either lit or dark means that the inboxes at the FSA and other European regulators are full of new initiatives awaiting their stamp of approval. Bizarrely, then, it looks like the regulators might play a greater role than they wanted in shaping the new liquidity landscape and deciding who the winners will be.
