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Happy Holidays

Now that everyone at Fidessa Towers is starting to wind down and prepare themselves for the Christmas break, I decided to look back at the predictions I made at the beginning of January 2009. As you can see from the table below, it looks like the Fidessa Fragmentation Index is a pretty good predictor of trends.

  • For the FTSE 100 we predicted an FFI value of over 2.0 and the actual is 2.38. We predict a value of 3.17 by the end of 2010.
  • For the DAX we predicted an FFI value of 1.87 and the actual is 1.88. We predict a value of 2.6 by the end of 2010.
  • For the CAC 40 we predicted an FFI value of over 1.69 and the actual is 1.82. We predict a value of 2.42 by the end of 2010.

If the 2010 predictions are accurate you can expect the LSE’s market share in lit trading of FTSE 100 stocks to fall further from its current level of around 60% to something like 40% by the end of 2010 (excluding any volume from its imminent acquisition of Turquoise or from the revamped Baikal). It’s not all bad for the LSE, however, as it has finally acquired enough pieces on the board to take on both the MTF community and the other primary European markets too. Its widely anticipated acquisition of Turquoise will give it a pan-European MTF (already equipped with live order flow) right from the get-go and its decision to launch FTSE index derivatives will challenge the other primaries’ derivatives markets as well. Xavier Rolet should be applauded for getting the LSE to act quickly and let’s hope that his Christmas stocking is overflowing with the energy he’ll need to integrate such a wide array of different technology platforms through 2010.

This is in contrast to NYSE Euronext which has bet the ranch on its single UTP infrastructure. If you read the adverts, UTP allows the trading community to connect from anywhere and trade any asset class within its network. This will be great when it’s finally complete but NYSE Euronext will still need to prove that it can offer the best of all worlds rather than a compromise between everything. This is particularly true in the multi-asset space as the different nature of derivatives and equities trading make it pretty hard to tune one single engine to be best of breed at both. Meanwhile, Deutsche Börse has launched its own pan-European market (XIM) as its first foray in the battle for non-German liquidity in the equities space. Like the LSE, it will also be listing derivatives based on UK stocks. Looks like the big boys have worked out where the next battle is going to be fought. Unlike equities, however, derivatives contracts are created and owned by the exchanges that list them and so it’s much harder to wrestle liquidity away from the incumbent (NYSE Euronext Liffe).

Meanwhile, in MTF land, the prediction at the beginning of the year was that we would see the number of viable alternative platforms reduce to three. Over the past few months Chi-X, BATS Europe and Turquoise seem to have comfortably filled this space and trade between 15-20% of the FTSE 100 and other primary indices such as the CAC 40 and DAX. Assuming that Turquoise is acquired by the LSE then it looks like BATS and Chi-X will be left to fight it out in the alternative venue space together with NEURO (which is the only venue right now that also offers a smart routing service alongside its matching platform).

One of the predictions that didn’t seem so accurate concerned the impact of dark pools although, if the volume traded on dark pools matched anything like the column inches they receive, then perhaps things would be different. This point was made at a Dark Pools debate organised by the Centre for the Study of Financial Innovation on Tuesday where someone commented that if dark pools had been given a more benign name (e.g. Added Liquidity Venues) then maybe there would not be so much fuss about them amongst the media and regulators. This is true but only up to a point. Whilst the volumes in dark pools registered as MTFs are still modest there has been a significant (34%) upswing in other not-lit trading activity. This is where the regulators really need to focus since it’s increasingly difficult for anybody to see exactly how and where this liquidity is being traded.

Anyway, my thanks as always to the guys at Fidessa Labs for all their hard work this year and to everyone else who has participated in this site.

Happy Holidays - see you in January!


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