Fragmentation special report

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Taping Fragmented Markets Back Together

A few years ago, the London Stock Exchange and Euronext tried competing for trading in stocks listed on each other's markets. Then, neither was able to steal share from the other. But 2007's Markets in Financial Instruments Directive regulation changed that, enabling the creation of new trading venues providing execution in stocks listed on exchanges across Europe.

The move has resulted in lower trading costs by introducing competition to an area previously controlled by large, domestic exchange groups. At the same time, firms seeking to exploit the benefits of these new venues have faced the administrative burden of sourcing data from multiple new venues-even if most multilateral trading facilities initially make their market data available free of charge-to create a definitive "European Best Bid and Offer" price to govern their trading and smart order-routing.
But fragmentation isn't just a European issue. Canada has also seen an influx of new trading venues competing for market share, while many also see potential for competition between markets in Asia Pacific. Even though these markets lack a common currency or regulatory framework, some say that venues with high-frequency trading platforms might attract traders ready to arbitrage latency between different platforms, while the Association of Southeast Asian Nations is already building a trading link between four exchanges, with the aid of NYSE Technologies.

In an article in this report, Fidessa's Andrew Barella notes that-like the Asean marketplaces- Europe does not have a single currency (since the UK still trades in pounds sterling) or regulatory regime. Europe also lacks a single clearing and settlement
mechanism and a "consolidated tape" of equity market data, which are both present
in the US, where equity trading is fragmented between a combination of exchanges
and ECNs. A consolidated tape is a bone of contention for many, who feel that the
fragmentation created by regulation should have been accompanied by a mandated
tape of pan-European data to enable affordable access to information from the new
marketplaces. Even Canada already has a consolidated tape, operated by exchange group TMX.

If a regulator is mandating fragmentation and best execution, should it not also mandate a definitive source of data for best execution?

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