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Dark Forces

At the beginning of September, BATS Europe announced further extensions to its inverted pricing model to include FTSE 100 stocks. At the same time NASDAQ OMX Europe extended its aggressive rebates, too. The LSE’s approach to these pricing pressures was to abandon its own maker taker price list and revert to its wholesale discount model. This was widely seen as favouring the big banks and brokerages which can generate high volumes but was also seen by some observers as potentially alienating the high frequency boys. This is because these firms specialise in arbitraging between the different maker taker discounts by rapidly moving orders from one venue to another.

At first glance, it looks as if these observers might be right. BATS narrowly beat Turquoise to third place for the FTSE 100 trading and NASDAQ’s volume across all indices exceeded a billion Euros for the first time last week.

Market Share by Venue

Also for the first time, a FTSE 100 stock, Capita Group, has broken through the 3 barrier (FFI 3.06). As with most things, however, it’s never quite that simple. Dig a little deeper and you can see that nearly 45% of the total volume in Capita was traded away from lit order books entirely. In fact, just two trades at Liquidnet accounted for nearly 7% of the entire volume traded that week in Capita.

Market Share by Category

So, maybe darker forces are at work here – it will be interesting to see how it all pans out. The other question that all this poses is what happens when (and if) the new alternative venues revert to normal pricing? Moreover, what is “normal” pricing anyway? Most people agree that one of the causes of fragmentation was that the primary venues lost the initiative with the big banks and brokers. I wonder if the high frequency traders will abandon the MTFs in the same way once all the pricing games have been played out. What might take their place? Maybe, as I wrote about last week, we will see a continuation of the trend whereby market makers or liquidity providers interact with order flow more directly without the need for third party venues at all.

One thing that does seem certain, however, is that everyone needs better information about what is really happening across lit and dark trading as the worlds of venues, brokers, market makers and buy-sides continue to converge through technology.

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