Although multilateral trading facilities (MTFs) are campaigning for inclusion of their trades in Europe’s blue-chip stock index pricing and volumes, the buy-side has so far continued to focus its attention on wider aspects of post-trade fragmentation.
Indeed, the MTFs’ quest to be included in indices like the FTSE 100, CAC 40 and DAX is closely tied to the ongoing consolidated tape saga, the European buy-side trader’s biggest bug-bear in the post-MiFID environment.
If the industry were to agree on standards for a consolidated post-trade data source for major European stocks, i.e. defining which venues qualify to be part of a tape and the type of liquidity included, index providers would be able to feed this price and volume data into their calculations.
Without a consolidated post-trade data source for Europe, buy-side traders argue that they are unable to get a full picture of where liquidity has fragmented to or benchmark executions accurately. Similarly, while indices are still only based on primary market activity, analysis of trader or fund performance against the whole market can prove difficult.
For example, if a buy-side firm is given a mandate to track an index such as the FTSE 100, the investment vehicle’s performance will not be truly representative of the actual liquidity traded.
“Without including MTFs in index data, you are not being transparent with your clients because you are currently forced to ignore a large chunk of the trading that is relevant to all investors,”says Carl James, global head of dealing, Fortis Investments. “Any trade done away from the domestic exchange impacts the value of an index, so even if a 1% share is traded on MTFs, this should be included in the index composition.”
The absence of MTF trades from stock indices also has implications for the reliability of transaction cost analysis data undertaken by third-party providers to benchmark the performance of buy-side dealing desks. Some buy-siders prefer their TCA providers to base their performance analyses on a custom-built view of market liquidity using the available data from MTFs and other trade reporting venues such as the OTC-specific BOAT.
“If you are using a TCA provider that doesn’t take in BOAT data, for example, you are not benchmarking your investments against the full market picture, which makes trying to conduct accurate real-time or intraday TCA impossible,” says Brian Mitchell, head of dealing at Gartmore.
Pressure on the index providers to change their approach may increase if MTFs begin to have a bigger influence over the daily closing pricing price, which is calculated based on trading in an auction period after market close, typically between 16.30 and 16.45 on European domestic exchanges.
In Europe, the vast majority of auction trading still takes place on the domestic market. MTF BATS Europe launched a closing auction for FTSE 100 stocks in October, but has so far had limited success.
“The volume going through the closing auction on domestic exchange is massive compared to the MTFs,” says Tony Whalley, head of dealing and derivatives, Scottish Widows Investment Partnership. “If the MTFs start muscling in on this space or if closing auction volumes begin to drop, then index providers will have to take note and change the way indices are calculated.”
To vote in the poll on MTFs’ inclusion in indices, click here