Last Friday, the 17th September, highlighted again the interrelationship between derivatives and equities in terms of fragmentation. The third Friday of the month is associated with futures and options expiration and so market participants close out positions
with a resultant surge in volumes on the primary exchange. You can see this effect clearly in the US, Canada and London as volumes crystallised around the
The question this raises is what quality of execution these market participants received (and whether they care). Take London, for example. The
LSE's average volume of the
FTSE 100 is around 30%, yet last Friday this jumped to nearly 45%. The same was true of New York where volume on the
NYSE jumped by about a third in terms of trading in
S&P 500 stocks last Friday.
I guess if you are the owner of an ‘in the money' option ticket then maybe you simply want to cash in your winnings, especially if you know there are probably plenty of other people in the queue behind you.
That's why most of this volume gets sucked into the pre-market auctions operated by the primary market centres. Nevertheless, in these days of super smart order routing, it seems odd that these folks don't have the same sensitivity to achieving the absolute
best price for the underlying cash leg.
As it stands currently, though, it does seem to be an area that the primary market centres have a bit of a stranglehold over, especially as this effect seems to be a global phenomenon. During the summer there was quite a bit of speculation in Europe over
how derivatives might be used as the next ammunition in the battle between venues. There are some obvious challenges in terms of fungibility and clearing, but any venue that can find a way to leverage the correlation we see every third Friday looks to be on