04.24.2014

Say Hello to Hyper-Fragmentation

04.24.2014
Terry Flanagan

With “fragmentation” having become firmly entrenched within financial jargon, the next buzzword to emerge is “hyper-fragmentation.”

Whereas fragmentation refers to the dispersion of liquidity across multiple trading venues for a single asset class, hyper-fragmentation refers to fragmentation within and across asset classes.

“We’re seeing a trend toward hyper-fragmentation, whereby some exchanges are further fragmenting their own offerings with multiple products,” said Steve Woodyatt, CEO of Object Trading. “At the other end of the spectrum, exchanges are integrating services across asset classes and resisting additional competition on the basis that fragmented liquidity will lead to a higher cost burden for the buy side.”

Hyper-fragmentation represents a large cost burden for the buy side, who must access multiple exchanges in order to execute multi-asset trading strategies. This implies increased capital requirements as well as increased compliance requirements.

This directly impacts the balance sheet of buy-side institutions in the form of margin allocation. “If buy-side firms are unable to allocate their capital effectively and have to fragment their margin in efforts to comply with regulations, the resulting increased transaction costs and necessary reduction in overall trading volumes may inadvertently stifle liquidity,” Woodyatt said. “With significant new collateral requirements around OTC swaps and other asset classes, the cost of doing business is rising dramatically while profit margins are increasingly squeezed.”

Object Trading, a provider of execution, real-time market data and pre-trade risk, is partnering with MarketPrizm, a provider of market data and trading infrastructure services, to offer Object Trading’s managed FrontRunner DMA on MarketPrizm’s platform for buy-side and sell-side firms.

The joint offering provides participants with managed network and colocation services, optional hardware provision, and a single gateway for market data and order execution with in-line pre-trade risk constraints on more than 60 equity, derivatives and FX markets globally, the companies said.

“A data enabled, managed solution will provide a considerable advantage to financial services firms by helping them avoid significant, up-front investments,” said Jay Hibbin, commercial director at MarketPrizm, in a release. “By combining MarketPrizm’s market data and managed infrastructure across Europe and Asia with Object Trading’s market access technology and expertise, we make it easier and faster for firms to trade in the markets.”

Woodyatt added, “The partnership between Object Trading and MarketPrizm provides on-demand access to multiple venues for market data and trade execution. It is a fully managed platform hosted by Object Trading, with underlying infrastructure as a service by MarketPrizm.”

Featured image via wacomka/Dollar Photo Club

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