Sunday, November 2, 2008

Liquidity Shift, LSE & Symbology

Further to my remarks:

2 things happened on that Monday (8th Sept) of the LSE outage.

One. Many of the brokers that were connected to Chi-X with smart order routers (SORT) had them referencing against the primary market LSE.
When the reference field ‘disappeared’ the SORTs did not onward route as they were effectively frozen (like a dog pausing sniffing for a bone before it runs).
Many brokers were disgusted with this single point of failure in their systems. If there was another such outage, I expect all the SORTs will have been re-calibrated by now. There was a lesser issue with some brokers in simply switching everything to Chi-X as the primary market. Brokers wanted it to be more of a collective shift, they didn’t want to be the ‘first’ (for fear of being picked off).

Two. Not sure how much weight to put behind this. Many brokers had confused instructions from their clients. Due to the nature of the LSE outage some people were unsure of the status of their fills – how much had been completed – what was the balance they could / should trade on Chi-X? The information coming out of LSE on the day was by some accounts poor hence people did not know what balance of an order they had to work.

Anyway, once bitten twice shy. Since then, Chi-X membership has continued to grow. All Chi-X could do on the 8th was remain open and reliable. That we did. In fact, the 8th, which started off looking like a record day, was actually not that great for us.

From the Chi-X sales team:

We have been busy on the development front - led primarily by your feedback, the most recent announcements being on sponsored access and on common symbology which we feel is a key component to further evolutionary development in Europe. In the fallout from the LSE outage the question most commonly asked of us on why we did not materially benefit from this outage. It is now clear that at the time, the primary Exchanges remained the reference price for many systems - rendering a large proportion of the market unable to trade on the MTF platforms. This in itself has changed, as many brokers have now decoupled this dependency, however there is a need to push for a consolidated feed. Common symbology is an important step; with MTF's using standard symbology, it will make it easier to move to a consolidated tape in Europe and for the vendors and the users of the market to make more informed trading decisions, thus able to ignore platforms who have experienced technical difficulties. It will also mount pressure on the last bastion of Exchange pricing control - market data. If the MTF's collectively trade a meaningful proportion of European trading - lets say 50% for the sake of argument - what justification do the incumbents have to continue to charge you 100% of their current market data charges? We hope that others will join us, BATS and Neuro in pushing this initiative forward.

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