FTSE begins to fill liquidity gap with Markit BOAT data

Index provider FTSE Group will use data from Markit BOAT, the pan-European cash equity trade reporting venue, in its review process to assess stock liquidity.
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Index provider FTSE Group will use data from Markit BOAT, the pan-European cash equity trade reporting venue, in its review process to assess stock liquidity.

FTSE conducts regular index reviews to ensure its stock indices remain an accurate reflection of the market or markets they are designed to represent.

According to a FTSE Group spokesperson, the Markit BOAT data will be used to assess the eligibility of index constituents, but daily calculation of FTSE’s indices will not be affected. This means the level of the FTSE 100 index of the biggest London-listed stocks by market capitalisation will continue to be calculated only using data from the London Stock Exchange, for example.

Index providers have been criticised for failing to reflect the increasing volumes of equity trading activity being conducted away from the primary exchange since MiFID introduced competition between venues in Europe.

The use of data from Markit BOAT in its index review process will not provide FTSE with a complete view of liquidity in European cash equities. Around 25 financial institutions report their off-order-book, or over-the-counter (OTC), trades to Markit BOAT, as well as four independent dark pools, NYFIX Euro Millennium, Pipeline, ITG POSIT and Liquidnet.

Markit BOAT estimates that trades reported to it by these organisations account for roughly 25% of total trading volume in pan-European cash equities. For UK trading, the proportion is higher: Markit BOAT says that 30% of all trades in UK stocks – and a similar proportion for the constituents of blue-chip FTSE 100 index – are published on its reporting platform. Markit BOAT believes that the firm reports 70-75% of total pan-European OTC liquidity.

“With about half of all trading activity in the European equity markets taking place off-exchange, over-the-counter trade data is of paramount importance to assess stock liquidity,” said Will Meldrum, managing director and head of equities data at Markit, the financial information provider that acquired BOAT from a consortium of banks in 2008.

But because only off-order-book trades are reported to Markit BOAT, the FTSE index review process does not take account of the roughly 35-40% of displayed, on-order-book trades in UK equities that take place away from the primary exchange, the London Stock Exchange.

Pan-European multilateral trading facilities (MTFs) such as BATS Europe, Chi-X, Nasdaq OMX Europe and Turquoise have gradually increased their share of equities trading in European stocks over the last two years, but have had their largest impact in the UK market. For example, Chi-X accounted for 21.5% of displayed liquidity in FTSE 100 stocks yesterday, according to Thomson Reuters.

FTSE Group said that it has not approached any of the pan-European displayed MTFs to use their data in its index review process. “FTSE works with market practitioners on an ongoing basis to monitor developments in market structure (including new trading platforms) to ensure that its indices continue to accurately reflect underlying markets,” the firm said.

Markit BOAT declined to comment on whether it has been approached by other index providers.