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Earlier this week Chi-X, the trading platform set up last year as an alternative to the London Stock Exchange, accounted for more than half the trading in Sage, the FTSE 100 software company. On the same day, Tuesday, it handled around 40% of the trading in Compass, the catering firm, and Next, the clothing retailer, and roughly a third of the business in Old Mutual, RSA, Pearson, Sainsbury and Aviva.
Tuesday was not unusual, and the list could go on much longer but there is enough here to make the point that Chi-X has successfully captured a significant slice of secondary equities trading, not just in london but in the other european markets where it competes. According to outside estimates, it now regularly accounts for between 15% and 20% of the trading in the FTSE 100 as a whole, though it remains a moot point whether this is business captured from the London Stock Exchange or new business captured by expanding the market. Whichever it is, with this and its wider European business Chi-X turns over about ¤4 billion of equity business a day and is getting close to consistent profitability - a remarkable achievement in such a short time.
But its very success brings to the fore other issues which no one has as yet bothered to think about. it is a common complaint, or possibly boast, that it is the London Stock Exchange where price discovery takes place and this and other planned new markets trade off its back because they do not have the liquidity to discover prices themselves. No one has challenged this assertion yet but when you reach the point where 50% of the trading has moved elsewhere - as in this case with Sage - can the london Stock exchange still claim to be the dominant price setter? Actually, it is more subtle than that. If the London Stock Exchange accounts for a majority of the shares traded, but say for example that the final 10 trades of the day took place on a rival exchange, can it legitimately claim to have set the closing price?
This may not matter much at the moment but it is going to have to be addressed sooner or later if only because stock exchange prices are now linked to thousands of other financial products and derivatives through the mechanism of the FTSE indices. It is a tribute to the quality and integrity of Mark Makepeace's FTSE company that while the reputation of rating agencies has suffered badly, no one has thought to challenge the integrity of FTSE indices data - and indeed it would cause chaos if they did. But one can see a potential difficulty in future if FTSE relies exclusively on data from the London Stock Exchange when it is no longer recognised as the place where all the price formation takes place.
Compiling indices is not the only problem, of course, for there have been a remarkable number of complaints from market users about the difficulty of keeping track of two sets of traded prices in the same stock. One might have thought watching two feeds at once should not be quite as hard as some traders make it sound, but that is not really the point because soon there will be three, four and possibly five competing venues with the arrival of Turquoise next month and then possibly Nasdaq-OMX and BATS by Christmas.
This also explains why these new market participants have been talking among themselves to create what in the United States is called a consolidated tape - a service which combines all the price information from all the different sources into a single feed.
This is harder to do than it sounds because each source has to operate to similar standards - you can't, for example, have one reporting a trade within two milliseconds and another reporting within two minutes. Clearly there are difficulties, but nevertheless the aim is to go public with their plans before Turquoise's launch.
Whether the London Stock Exchange joins the party is another issue. It is thought to be not keen - perhaps because as it sees such a move as undermining it own position while giving credibility to the others, partly because it makes a lot of money selling its own data to users.
But long term who knows? It may be something it finds too hard to resist.
