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The Emmental Enigma

Those of you that have followed this blog know that I have commented a few times on the impact on fragmentation when a primary market has been unavailable (see the croissant hypothesis and the bacon roll theory). Well, yesterday it was the turn of SIX Group to run the experiment. Due to a technical glitch, SIX was unable to provide prices on major Swiss stocks for a few hours yesterday afternoon. A quick spin through the Fragulator shows some intriguing results that seem to counter the conclusions that were drawn before.

Total average volume of SMI stocks was around 111,000 trades on the 3 days prior to the problem. This fell by around 30% yesterday due to the outage, but the interesting bit is how the remaining volume traded. Chi-X, BATS, Turquoise and Nasdaq Europe all traded the same or greater volumes than they had previously despite the fact that the primary market was unavailable. This seems to counter the view that traders ignore a stock altogether when primary markets are down and, as a result, price formation happily took place between the MTFs only without the need for a “parent” exchange. What this shows is that, for Swiss stocks at least, the MTFs are now regarded as completely legitimate venues in terms of providing credible price formation even when the primary is down.

It’s not all going the MTFs way though, as further analysis shows that OTC trading increased by 46% yesterday when compared with the average of the three days before. OTC trading, therefore, was actually an even bigger winner than the MTF community as a result of the SIX outage.

The MTFs that find ways to attract this volume onto their own dark segments could be the liquidity winners of the future.

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