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Last Mover Advantage

Last week was a good week for fragmentation. BATS continues to build on the impressive start it made last year and it was great to see that volumes at Turquoise are starting to get back to the levels (over 6% of the FTSE 100) it enjoyed before the end of the market making obligations. The last 6 weeks have also seen impressive growth in volumes at Chi-X. The fact that all of the top twenty most fragmented stocks have an FFI of around 2 or above is further evidence of the increasing rate of fragmentation.

Buried amongst all this data I was intrigued to see that fragmentation of FTSE 250 stocks seems to be accelerating, too.

This is especially significant as the small/mid-tier broker dealers (many of whom tend to specialise in these stocks) have largely been able to watch fragmentation from the side lines. It looks as if this is changing now and so these firms may need to be beefing up their SOR capabilities quicker than they thought.

Having said all of this, the big primary venues have now had the chance to assimilate all the different initiatives underway within the MTF community and so should have a good grasp of what works and why. In this regard there may, paradoxically, be an advantage in going last especially as the European trading landscape is now in much better focus. Nowhere is this more true than in trading dark liquidity. The MTF community has been working hard on creating a variety of different dark pools and the announcements of “point to point” sharing of dark liquidity by the large broker dealers seem more opportunistic than strategic. To my mind, the stage is set for an MTF, broker dealer or a primary venue to totally dominate this space. It is estimated that anywhere up to half of European liquidity is traded away from lit platforms and so the rewards for success in this area look pretty significant. Maybe what we have seen so far, then, has just been the prelude to the real battle for European liquidity.

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