Liquidity in European markets is fragmenting rapidly as new MTFs have unveiled a range of low cost alternative trading platforms. Understanding how different stocks are fragmenting across these new venues is essential to implementing effective best execution strategies for both the buy and the sell side.
"Everyone agrees that liquidity is moving away from primary venues but there is no industry standard way to compare fragmentation quickly and easily between different stocks, indices and venues," explains Steve Grob, director of strategy at Fidessa. "This is exactly what we set out to achieve through the creation of the Fidessa Fragmentation Index."
The Fidessa Fragmentation Index provides a single number to show how a stock or index is fragmenting and so itâs now easy to measure and compare fragmentation across Europe. In this way, the FFI can help the sell side understand where and how it should implement Smart Order Routing (SOR) and help buy side firms identify where to direct their flow.
The Fidessa Fragmentation Index is available via an interactive web site that also provides a dynamic and fluid forum designed to provide an evolving consensus on the new liquidity landscape. Very much shaped by its users, the site also anticipates the next wave of changes in the market and examines the impact that these will have on the community at large, on trading styles and on the adoption and application of technology following the implementation of MiFID.
The FFI is calculated using proven mathematical principles, and shows the average number of venues that should be visited to achieve best execution when completing an order. An index value of 1 means that the stock is still traded at a Primary Exchange. Increases in the FFI signify increasing fragmentation of liquidity across further venues. An index value of 2 or more shows that the stock has been fragmented significantly and to the extent that it can no longer be regarded as having a Primary Exchange.
Steve Grob continues: âEach day we calculate the FFI across all the constituents of the major European indices, and this has shown us just how many stocks are fragmenting and the rate at which they are doing so: the FFI for the FTSE 100, for example, has risen to a peak of 1.77 and some individual stocks are already breaking the 2.0 barrier on a regular basis. Itâs clear that the ability to seek out liquidity in an intelligent fashion, coupled with the ability to trade across multiple venues is going to be key to successful operation in this market.â
The FFI covers the constituents of all the major European indices: AEX, BEL 20, CAC 40, DAX, FTSE 100, IBEX 35, MIB 30, OMX 30 and SMI. To present a complete view of a stockâs status, the FFI takes into account the total number of venues over which it is fragmented, and reflects, for example, the difference between a stock that is split 80:20 between a primary and alternative venue, and a stock that is split 80:10:10 between a primary and two alternative venues. It also enables changes in fragmentation to be plotted over time and allows comparisons in fragmentation to be made between different stocks and indices in real time and historically.