While displayed pan-European multilateral trading facilities (MTFs) have been vociferous in their calls to get the liquidity traded on alternative venues incorporated into stock index calculations, index providers remain unmoved.
MTFs argue that by not including the volumes executed on their platforms in the constituents of blue-chip indices such as the FTSE 100, CAC 40, DAX and SMI, European traders that want to benchmark a portfolio or make a passive investment are not receiving a true representation. According to data vendor Thomson Reuters, MTFs regularly account for around 25% of pan-European trading.
But not all are convinced of the need for change.
“It is understandable that MTFs want to be treated on an even footing with their exchange rivals,” said one exchange source. “However, from a customer point of view, it is unclear how strong or material the demand is.”
While MTFs might argue that price formation for many blue-chip stocks has moved away from the primary exchange, with some high-profile names sometimes trading more heavily away from their listed market, the difference in prices offered across trading venues remains relatively marginal for the most liquid stocks. For example, the price for Vodafone on both the London Stock Exchange and BATS Europe was 151.1p at 12.55 pm on 15 March.
The inclusion of liquidity on MTFs in indices may have more impact on index-based derivatives, widely used both for investment and hedging purposes.
If a trader wants to invest in an index derivative that is calculated according to the volume weighted average price of its constituents, for example, the liquidity found on alternative venues is an important factor in calculating an accurate expiry price.
Christian Katz, CEO of SIX Swiss Exchange, notes that buy- and sell-side firms may be happy with the status quo because of an established level of “trust” in the prices on exchanges compared to MTFs.
“Exchanges are responsible for market surveillance, market control and market abuse monitoring and they put a lot of resources into these activities,” he says. “Therefore, investors may have a lot more trust in the prices formed on a recognised investment exchange as compared to other venues.”
Katz also suggests that multi-venue indices could lead to logistical difficulties. If a trading suspension of an individual stock was not spotted by a MTF that trades thousands of stocks across multiple jurisdictions, the calculation of the index of which it is a constituent could be skewed by incomplete data.
Moreover, Katz observes that the perceived reluctance of index providers to add MTF liquidity into their calculations is simply a reflection of market demand. SIX Swiss Exchange is part of SIX Group, which – along with Deutsche Börse – also has a stake in STOXX, a provider of market indices, including pan-European blue-chip index the Euro STOXX 50.
“If the demand for MTFs’ inclusion in indices was as big as the MTFs themselves have conveyed, index providers would have undoubtedly made this change,” says Katz.
This is also the position that seems to be held by index providers. While four leading index providers declined to be interview for this article, FTSE gave the following statement, while STOXX gave one to the same effect.
“We currently do not have any plans to change the underlying calculations of any of our European pricing sources,” read the FTSE statement. “We are constantly consulting with the market and our customers on their needs and if they were to ask for the inclusion of alternative venues in index calculations, we would respond accordingly.”
Next week: Sell-side index usage
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