Fragmentation is a hot topic in Europe these days. Volumes have been shifting around since the Markets In Financial Instruments Directive (MiFID) went into effect in November of 2007 and there has been an explosion in the number of new trading venues called multilateral trading facilities or MTFs to compete with the traditional exchanges.(You've all heard of Chi-X, Turquoise, and no doubt BATS Europe and Nasdaq OMX Europe, and other lit pools to come.) To help the industry sort this out, (and no doubt, to market its brand a bit), Fidessa group plc, created the Fidessa Fragmentation Index or FII.
According to Steve Grob, director of strategy at Fidessa in London, FFI was born out of an internal project. With the barriers to entry falling and many new MTFs trading Pan- European securities, as a technology vendor, Fidessa had to figure out which ones to connect to and so it needed an internal yardstick to measure these MTFs against. Here's how it works: "If the FFI of a stock is near to one, you would probably know you could trade the stock on its proprietary exchange. If it hits two, you would most likely need two venues to complete a trade," explained Grob.
I think this is very interesting because Fidessa is a provider of trade order and execution management systems, market data and connectivity, and it has used its position to bring something of value to the industry.
How is the industry using Fidessa's Fragmentation Index? Grob said the sell-side community is using the FFI to see how much money they want to spend on smart order routing technology because they can look at the type of stocks they typically trade and then compare that to the FFI. If the FFI is low, they can wait, whereas if it's high, there is more urgency, said Grob.
Buy-side traders are also looking at index to make intelligent order routing decisions to brokers. "If the FFI is low, then they can send the order through a cheap, low-cost DMA (direct-market access) broker that will trade it on an exchange," explains Grob. "But if the FFI is high then they can pay more to route it to a more sophisticated broker who has a smart order routing technology that is going to hit more venues," says Grob, who also writes a blog commenting on news developments with MiFID and the various MTFs.
For instance, two weeks ago, Turquoise's liquidity agreements with its founding bank and broker partners expired, which caused a drop in the MTF's volume. Grob analyzed where the "lost liquidity has gone to," noting that "BATS and Chi-X volumes have crept up marginally but so have volumes at the primaries."
The index also lets you look at the market share of each single venue including the primary exchanges as well as the new MTFs. Fidessa also compares the fragmentation in the major European indices, such as the FTSE 100 to the CAC 40 vs. the DAX. "You can immediately see that the fragmentation in the London market is higher than in mainland Europe," pointed out Grob. "But you can also see that the rate of fragmentation in France and in Germany is growing faster than it is in Lonodn," he said. Right now, the Fidessa index is a free service, updated weekly, which is provided to anyone that subscribes. It's a site worth checking out!With the barriers to entry falling and many new MTFs trading Pan- European securities, as a technology vendor, Fidessa had to figure out which ones to connect to. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio