With MiFID leading to new venues for European equities execution, the impact of fragmentation has been debated in the industry for some time. But how to track if, and to what pattern, that liquidity fragmentation is happening? Enter the Fidessa Fragmentation Index (FFI).
The FFI was launched in November 2008 and provides an essential tool for the buy-side and the sell-side to understand the trends in the evolving market landscape. It was made freely available to the market through an open access web site from the date of its initial launch - with the expectation that it would then evolve in accordance with industry feedback.
Prior to the FFI, venues and vendors typically calculated the market share of each European exchange/MTF by volume or percentage share independently. There was no common yardstick to measure how trading of stocks was changing across these multiple new venues.
The FFI provides an immediate, simple, standard measure of stock/market fragmentation that applies equally across established exchanges and the new alternative venues. The FFI is presented as raw numeric data and as graphs that can be used to compare fragmentation between different stocks/indices/segments/markets both in real time and historically.
Following the introduction of MiFID, the pattern of equity trading in Europe is changing rapidly. For sell-side institutions, the FFI shows the number of venues a trader needs to visit to complete an order and achieve best execution. An increasing FFI value shows how a stock or market is becoming more fragmented and so identifies situations where the level of fragmentation is such that the use of Smart Order Routing (SOR) tools is essential.
For buy-side players, the FFI enables more informed decisions to be made about the brokers/services they use based on the exchange/MTF coverage and SOR facilities they can now see they may need. Given the current trend of increasing use of DMA by buy-sides, this is particularly important.
The FFI's website is an integral part of the project. The blog invites comment, and the discussion is shaped by its users. Following users' suggestions, the first major change since the FFI's inception was to extend its coverage to a broader range of stocks. Through its collaborative nature, the FFI encourages an evolving consensus on the impact of the next wave of post-MiFID changes on the trading community, its trading styles and on the adoption and application of technology.
Fidessa's approach was to deliver the FFI as interactive website allowing the entire trading community to influence and enhance the service. Rather than building and deploying physical systems themselves Fidessa used an innovative third-party modular approach leveraging many best of breed services:
- the website runs on a virtual server in the Amazon Elastic Compute Cloud, utilising Amazon's internet bandwidth, network security, hardware resilience and scalability
- the rawtrade data is taken from Fidessa's existing Ticker Plant, which processes data feeds from more than 50 European equity markets
- a new staging server, housed in Fidessa's own data centres, processes the trade data and uploads the resulting fragmentation data to the Compute Cloud to allow thousands of users immediate access
- the website makes extensive use of the web-based Google chart API to present all the graphics and charts
- a customised version of Wordpress is used for content management and the blog
Integrating best of breed solutions into a cohesive business solution enabled Fidessa to build, test and deliver the system from conception into production faster than would have otherwise been possible. The architecture supports a high degree of interaction, allowing user-driven changes to be made very quickly.
Finextra verdict: This was a rapid response from Fidessa, using its own existing resources and off-the-shelf technology, to bring transparency to market structures in a state of transition. As a free service to the industry, it helps cement Fidessa's position as a thought leader in European trading.