The battle for multilateral trading facilities’ (MTFs) inclusion in leading European blue chip stock indices has intensified, with an overwhelming majority of respondents to the latest TRADE Poll agreeing that trades conducted on displayed MTFs should be included in index calculations.
Eighty-four per cent of respondents to March’s poll voted that MTF trading should be included in index calculations, while the remaining 16% thought it should not.
But despite lobbying from all sides of the industry – both buy- and sell-side firms have raised the issue separately via the Investment Management Association and the Association for Financial Markets in Europe (AFME) respectively – index providers continue to stall.
“Index providers have been open and receptive, but the general feedback has been that they will only include us if clients demand it, which this survey clearly shows they are,” says Alasdair Haynes, CEO of Chi-X Europe. “But even with increased demand, index providers have also indicated that it may not be until 2013 that MTFs will be included in national indices, which is ridiculous.”
Some market participants contend that the marginal differences between prices on displayed MTFs and domestic exchanges mean that the value of an index – typically updated every 15 seconds based on the last sale price of each of its constituents – would not be altered significantly by a more inclusive approach by index providers.
Haynes counteracts this argument by noting that while arbitrage trading helps to keep the difference in stock prices between fragmented European markets minimal, a more pressing issue is how index-based derivatives are traded.
Products that are based on indices, such as some options and futures and index tracking funds, are benchmarked based on trading on domestic exchanges only. Therefore, in order to trade against an index benchmark, liquidity in the underlying instruments is forced on to the close at domestic exchanges, at a potentially worse price for the end-investor.
But some sell-side firms feel there is value in the status quo.
“The only index price that really counts for brokers is the closing price and that is still derived from the primary exchange auction, which is effect a monopoly,” said one head broker. “Meeting those benchmarks would be more difficult if the closing auction was fragmented across multiple venues.”
Commercial considerations may also play a part. Most major European indices are owned by the domestic exchanges, which Haynes believes is a major barrier to the inclusion of MTFs. For example, NYSE Euronext runs the national indices for the markets it operates in Belgium, France, Portugal and the Netherlands, while the London Stock Exchange jointly owns FTSE with the Financial Times.
“There also seems to be a psychological aspect to this issue from the national exchanges, as letting MTFs become a part of indices would be an admission that they are a genuine part of the price formation process,” says Haynes. “Exchanges would also see their data revenue slashed if they are no longer the sole source of data for index-based derivatives.”
According to Adrian Fitzpatrick, head of investment dealing at Aegon Asset Management, another possible reason for the delay could be the rapid rise of alternative trading venues in Europe.
“The success of Chi-X and BATS Europe in particular and the impact that MTFs already have on price formation undoubtedly took some people by surprise,” he says. “Most of the industry is now talking about what will be included in MiFID II, which may have meant caused the debate on index composition to be swept under the rug for now.”