Connectivity problems at the London Stock Exchange (LSE) today did not result in a large-scale market switch to rival multilateral trading facilities, market sources reported.
The LSE began to lose connectivity to market participants at around 08.15 this morning, but relatively few market participants were able or willing to migrate trading on either Chi-X, the MTF owned by agency broker Instinet Europe or Turquoise, the alternative trading venue backed by nine investment banks that went live last month. Continuous trading was resumed at 16.00 this afternoon, and the LSE posted a notice on its website on 16.49 confirming that trading had closed for the day.
“This is the day you’d have expected the MTFs to step up, but it isn’t happening,” said a head of trading at a large London-based hedge fund, who said that the fund had been unable access sufficient liquidity on any of the newly-established MTFs.
According to data from broker JPMorgan, the level of liquidity fragmentation in the UK equities market was little changed today compared with recent weeks, despite the suspension of trading at the LSE. In trading until midday, the total value of share trading on the LSE stood at $2,494 million, with Chi-X trading $672 million and Turquoise standing at $6 million. As such, JPMorgan’s fragmentation index for the UK market stood at 17.77%, relatively unchanged from levels seen in the previous three weeks (18.78%, 17.47%, 20.09% respectively). Total trading volumes up to 12.00 were well below half of the last three weeks' daily average, according to the broker's data. Prior to the resumption of trading this afternoon, the LSE had executed just 23% of its recent daily average volume (Chi-X: 28%, Turquoise: 35%).
Brokers said that primary among the reasons why liquidity in UK blue-chips equities had not moved wholesale to the MTFs was the LSE’s primary role in price formation. One European broker-deal said that, following the re-routing of orders from the LSE to Chi-X, it experienced significant price spikes on the MTF. “The prices seemed very out of synch and we had no way of benchmarking, so we stopped sending orders to either venue,” the source said.
Other brokers said they were continuing to route orders to the MTF, but at relatively low volumes. "Our smart order router has been able to switch off the LSE as a destination and route to alternatives such as Chi-X and Turquoise. But because we're in a 'half-fragmented' market right now, it is understandable that firms should be reticent about posting liquidity away from the LSE because of its primary role in price formation," said Tom Middleton, head of algorithmic products, EMEA, Citi. Middleton added that all brokers were exercising caution on behalf of clients.
Buy-side traders said they were comfortable routing some but not all orders to alternative venues. "We have directed our flow via some brokers to MTFs like Chi-X,” said Brian Mitchell, head of dealing and portfolio control, Baring Asset Management. “The LSE is still a primary price source for a number of UK stocks. We put a relatively small number of UK orders in this morning and most of them have traded on Chi-X, but it will not have been appropriate to implement others there." Mitchell said that 75% of Baring’s orders were traded on Chi-X this morning. “All the ones that
we could practically trade there, given the liquidity and the size of the orders, we have," he said.
Tony Whalley, investment director, Scottish Widows Investment Partnership, said it was too early to expect smaller venues to take up the slack during such a significant interruption to trading on the UK’s primary exchange. “If the major reference point is not available, people become more and more reticent about trading. For the first half hour, one was able to trade a bit of stock through Chi-X, Turquoise and so on but after that really people just shut up shop,” he said. “One questions the robustness of the system when you get peaks of activity if it can’t cope.”
The LSE is scheduled to release an upgrade to its TradElect electronic matching engine in October that will increase capacity to 20,000 continuous messages a second.
According to Chi-X’s own figures, the MTF captured a market share of around 15-20% in some leading UK blue-chip stocks during August. Turquoise, which has only been trading all its 1,267 stocks since 29 August, has claimed a market share of 10% in some stocks, but its overall market share is thought to be considerably smaller.
A number of sources said that the level of liquidity fragmentation in the UK equity market was currently too low for rival platforms to take advantage of the LSE’s technical problems, citing its primary role in price formation. Once MTFs increase market share further and brokers begin to source from a variety of venues in the price formation process, UK share trading would likely be able to continue relatively uninterrupted by a further outage at the LSE, they said.
"Should the market move to a consolidated approach for price formation? I think that time is rapidly approaching,” commented George Andreadis, head of AES liquidity strategy, Credit Suisse.
Peter Baillie, senior equity dealer, Martin Currie Investment Management, said the market seemed “unwilling” to fully embrace alternatives in the absence of the primary exchange. “Perhaps this is confirmation that the main exchanges are still seen as the 'definitive' pricing point, with volume discovery and improvement elsewhere,” he said.
Both the Johannesburg Stock Exchange and the Intercontinental Exchange, which both use the LSE's SETS electronic trading platform, also suspended trading today for technical reasons.