LSE outage demonstrates its' importance

The Source, installed by artists Greyworld int...Image via Wikipedia Yesterday's connectivity outage at the London Stock Exchange appears to have demonstrated the parasitical nature of some of the "competing" execution venues. Despite being "off-air" for most of the day, trading did not apparently switch to the other venues and some were left floundering in the absence of a price formation mechanism normally supplied by the "primary market" [LSE].

Measured by the value traded, Chi-X looks to have been down by a third on the previous business day [Friday]. Turquoise and ITG were similarly affected.

There are several possible reasons for this failure
- Too few firms were signed-up as customers of the alternates to enable the market to switch entirely. However, business levels weren't even maintained on the alternates.
- Some business on alternates may be as a result of artibrage trades between the primary and alternate markets, but the closure of one of these meant these opportunities weren't available. However, it is unlikely to represent a significant chunk of volume.
- Investors/Dealers were nervous to trade anywhere in the absence of the primary market, concerned that they had imperfect information on which to trade. Likewise without clarity over where liquidity would migrate to [missing herd instinct] traders stayed put and waited. Hence volumes everywhere dipped.

Of course, this outage should encourage firms to implement the means to trade on alternate venues in order to mitigate against similar problems in the future. However, I think the execution venues will need to do some self-scrutiny to understand why they failed to capitalise on the opportunity and initiate plans that will seek to address the issues. Most importantly, they have to persuade the "herd" that grazing on their turf is the perfect substitute.

Meanwhile, the Daily Mash has an excellent spoof report on how the market reacted yesterday, which was reproduced in the Daily Telegraph.

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