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Fidessa Unveils European Fragmentation Index
November 20, 2008
Fidessa Group, a London-based technology provider, has launched an index that measures the state of liquidity fragmentation across European Union trading venues. Announced Nov. 19, the Fidessa Fragmentation Index (FFI) is freely available at fragmentation.fidessa.com.
Since the Markets in Financial Instruments Directive (MiFID) went into effect about a year ago, a host of multilateral trading facilities (MTFs) have emerged to compete with the national exchanges. “Everyone agrees that liquidity is moving away from primary venues, but there is no industry standard to compare fragmentation quickly and easily between different stocks, indexes and venues,” said Steve Grob, director of strategy at Fidessa, in a statement. “This is exactly what we set out to achieve through the creation of the Fidessa Fragmentation Index.”
The FFI provides a number for each European security or index--if the value is 1, a stock is still traded solely at its primary exchange. Fidessa, which says the index will help buy- and sell-side firms implement their best-execution strategies, arrives at the number by calculating the inverse of the sum of the squares of the market shares of each individual venue. Increases in the FFI signify increasing fragmentation.
In order to link stocks across several platforms, the FFI references their international securities identification numbers and currency. Fidessa says that such an analysis intentionally omits fungible stocks because many trading firms have conflicting views on how to define fungibility.
“Each day we calculate the FFI across all the constituents of the major European indexes, and this has shown us just how many stocks are fragmenting and the rate at which they are doing so,” said Grob. The FFI value of the FTSE 100 index has risen as high as 1.77, he noted, and some stocks have begun climbing above 2 on a regular basis. “It’s clear that the ability to trade across multiple venues is going to be key to successful operation in this market,” he added.
Buy-side firms that understand which markets are offering liquidity in a share are armed with more information when choosing an executing broker, said Grob. “They might opt for one broker-dealer if liquidity is concentrated only on a single market but another broker-dealer with superior order-routing technology if trading is fragmented,” he said.
Because the FFI treats each venue equally, said Grob, it provides a more accurate and transparent reflection of liquidity. In contrast, he asserted, some agency brokerages and MTFs give more weight to their own platforms when doing analysis. The Committee of European Securities Regulators is currently seeking industry comment on the effects of MiFID on transparency for regulated markets, multilateral trading facilities and systematic internalizers--entities that cross trades against their own books.
The FFI, which covers the constituents of all major European indexes--the AEX, BEL20, CAC40, DAX, FTSE 100, IBEX 35, MIB30, OMX30 and SMI--takes into account the total number of venues on which a stock or index is trading. The fragmentation index will indicate, for example, if 80 percent of a stock’s shares are trading on a primary exchange and 20 percent on an alternative venue, or 80 percent on an exchange and 10 percent each on a pair of MTFs. The FFI also enables changes in fragmentation to be plotted over time and allows comparisons to be made between different stocks and indexes, both in real time and historically.
The introduction of FFI is the latest in a series of enhancements Fidessa has made to bolster its position in the European market. In a statement issued in late October, chief executive Chris Aspinwall warned the firm would be affected by increased consolidation in the investment banking sector, which would “further pressure expenditure on a number of clients.”
