WFE WORKSHOP ON MARKET STRUCTURE AND STATISTICS How can statistics reflect the new market structure?

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WFE WORKSHOP ON MARKET STRUCTURE AND
STATISTICSHow can statistics reflect the new
market structure?

• FRAGMENTATION ROUNDTABLE

Luca Filippa LSEG Strategy / RD Paris, Hotel
Ambassador, 1st December 2008
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Fragmentation Roundtable
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Some Statistical Remark

• A research on Google about fragmentation would
  lead to
• 8 610 000 results for fragmentation
• 1 090 000 results for market fragmentation
• 554 000 results for equity fragmentation
• 211 000 results for equity market
  fragmentation
• Not a bad impact factor for a less than 20 years
  old phenomenon

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Exchange Industry Recent Evolution

• Business profitability of the sector
  significantly driven by economies of scale and
  scope (e.g., lower IT costs, ability to attract
  pools of liquidity)
• New needs for product innovation
• New players coming into the market
• Competitors
• Direct clients
• Partners
• Changes in the governance of Exchanges
• Review of objectives, changes in the business
  model and revenues composition for Exchanges
• Interest for post trading issues
• Geographical extension of opportunities and
  challenges
• Further needs for regulatory harmonization and
  progressive harmonization among Authorities
  following consolidation processes
• Efficient services to collect and disseminate
  information
• Alliances / Consolidation process

Exogenous forces

• Recent evolution of IT electronic platforms,
  easy access to international marketplaces and
  creation of new products
• Ongoing regulatory pressure (e.g. FSAP in Europe,
  Reg NMS in the US)
• Market participants needs
• Monetary infrastructure (EU) introduction of the
  euro, eliminating currency risks and increasing
  transparency across European countries

Market constituencies

• Broad product offering, liquidity, ICT efficiency
• Ongoing consolidation of the banking sector,
  resulting in increasing relevance of
  international/global intermediaries
• Institutional investors increasingly considering
  Blue Chips as a single asset class across
  Countries

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Main Drivers IT, Regulation, Globalisation - A
Conflicting Role

• On one hand, fostering greater efficiency in
  trading systems, simplifying connections and
  reducing costs to operators, they exalted
  positive networks externalities that characterise
  the production of liquidity, significantly
  increasing size and role of Exchanges
  strengthening their central position in the
  financial system

• On the other hand, they create a tendency to more
  homogeneous market models fostering procedure
  automation, lowering entry barriers, opening the
  exchange industry to new competitors, which are
  not necessarily organised as regulated markets

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Item 1 the Scenario

• What is the current situation in different
  geographical areas?

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Item 1 the Scenario (continued)

• Europe - The change induced by MiFID after
  November 2007
• Some metric the Fidessa Fragmentation Index

Source http//fragmentation.fidessa.com/stats/
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Item 2 Metrics

• What are we talking about when we talk about
  trading? Is there a common meaning / reliability
  / usefulness?
• The problem of the potential overlapping how
  to face it?

• Trading on order books / systems organised by
  Exchanges / MTFs / ATSs
• Automatic matching (rules)
• Access to trading
• Pre-trade transparency
• Post-trade transparency

• Reporting of trades executed between
  intermediaries (or with final customers)
• Matching managed by
• intermediaries
• Limited access
• Limited pre-trade transparency
• Post-trade transparency

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Item 3 Fragmentation or Competition? Only a
Question of Points of Views?
Competition!
Fragmentation!

• Execution
• Trading Data
• Reference Data

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Item 4 Impact on Different Categories of Players

• Buy Side
• Sell Side
• Issuers
• IT Providers
• Information Products Providers
• Regulators
• Exchanges

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Item 5 Any Missing Link?

• Do we need
• further regulatory steps?
• more strict enforcement on transparency? / on
  best execution?
• more efficient smart-order routing systems?
• wider generation / dissemination of quality
  indicators?
• Or is it simply a matter of time and we are
  observing a natural evolution of a shift induced
  by a structural change, were players adapt with
  different speed to the new state?