Flowin’ with the LSE
The London Stock Exchange has released its new Flow Analytics product [Note 1], comprised of the Market Flow and The Market Concentration reports. These reports provide traders with more granular information on the participant makeup on the London Stock Exchange Order Book.
Market Flow breaks down the total on-book traded volume for an instrument, on a given day by each of the three MiFID trading capacities, MTCH, DEAL and AOTC. Market Concentration adds to this by summarising the concentration of trading volume amongst members using the Herfindahl-Hirschman-Index (HHI) for each instrument.
Market flow
Market Flow reflects our ongoing commitment to enhancing transparency in our markets, whilst ensuring the privacy requirements of our members are met. The report provides a daily breakdown of volume executed on the London Stock Exchange, segmented according to the three MiFID trading capacities – MTCH, DEAL and AOTC.
As an illustrative example, Table 1 showcases the Market Flow statistics for Rolls Royce PLC (TIDM RR.) ordinary shares a year ago, on 22 August 2024. This time last year, Joe Biden was the president of the United States; there was political uncertainty in France; and breaking, more widely known as break dancing, had just made a scintillating debut at the Paris Olympics. In markets, the FTSE 100 would close at 8,288.00, 10 year gilts were hovering around 4%, and cable was 1.31.
The rows show the volume of shares that were executed by each of the MiFID trading capacity types and how this is broken down into buys and sells. In this case, trades executed as DEAL were net sellers of Rolls Royce shares, buying 4.2m and selling 5.1m for a net of -930,755 shares. Since every buy has to be paired with a sell, MTCH and AOTC were net buyers, buying 8,119 and 922,636 shares respectively. DEAL was the largest category, trading 72% of all shares. We can cross-reference this with data from the Total Market Volume product [Note 2], which shows there was a total of 27.8m shares traded across all other venues and mechanisms.
Table 1
| Buy Volume | Sell Volume | Net flow | ||||
|---|---|---|---|---|---|---|
| MTCH | 922,975 | 14% | 914,856 | 14% | 8,119 | 0% |
| DEAL | 4,166,608 | 65% | 5,097,363 | 79% | -930,755 | -14% |
| AOTC | 1,338,902 | 21% | 416,266 | 6% | 922,636 | 14% |
| Total | 6,428,485 | 6,428,485 | 0 | |||
So, what does this tell us - what kind of activity should we expect to be categorised as MTCH, DEAL, or AOTC? The majority of volume executed on the London Stock Exchange has a DEAL trading capacity – “dealing on own account”. Article 4 of MiFID II defines this as “trading against proprietary capital”, so does this indicate that 65% of buy trades and 79% of sell trades in Rolls Royce stock were executed by proprietary trading firms? The answer is a clear no. The DEAL category encompasses a wide range of trading activity, including banks facilitating certain types of client transactions, hedging activity related to Systematic Internaliser (SI) risk books, and various other forms of execution. When a client executes an equity trade as a total return swap or other synthetic instrument, any associated hedging activity by the writer is typically classified as DEAL. This means that flow commonly described as ‘institutional’ or ‘long only’ may well be represented in this category. Users of this data set should therefore consider the make-up of each category in their entirety. The Market Flow report does not attempt to classify flow into categories such as institutional or retail, it only reflects the capabilities as defined by regulation.
Trades executed as a MTCH capacity should be executed by a firm facilitating client trading activity where they are executing both sides simultaneously and taking no market risk [Note 3].
The final MiFID II capacity is AOTC – Any Other Trading Capacity. This catch-all capacity contains all transactions that don’t fall into the MTCH or DEAL capacities. Agency transactions would be a classic example of a transaction that would fall into the AOTC capacity.
Market concentration
The Market Concentration report complements the Market Flow dataset by providing a different perspective on the makeup of our market – a measure of the concentration of trading activity between members who trade each instrument. It is measured using the well-established HHI which sums the square of the percentage share of trading of each member, resulting in a number between 0 and 1. The closer the number is to 1, the more concentrated the market activity is towards a single member. In the other direction, the closer it is to 0, the more distributed trading is across members. The index is calculated at the member level, so multiple end-users trading through the same member would count as one.
Table 2
| Auction | Lit Continuous + Auction | |
|---|---|---|
| Buy | 0.16 | 0.11 |
| Sell | 0.11 | 0.08 |
| Overall | 0.09 | 0.07 |
Table 2 shows the market concentration for Rolls Royce PLC (TIDM RR.) ordinary shares on 22 August 2024. The Market Concentration product provides the HHI for all on-book trading and for auction mechanisms separately on the London Stock Exchange, broken down into “buy”, “sell” and “overall” categories [Note 4]. An HHI closer to zero indicates trading is distributed over more members, and some have suggested that a market with an HHI value of less than 0.15 is considered “unconcentrated” [Note 5]. Rolls-Royce had an overall HHI value of 0.09 for auctions, which can include the open, close, EDSP, and volatility auctions, and 0.07 for lit continuous and auctions, both well below this threshold.
Wrapping up
The client make-up of the London Stock Exchange continues to generate interest from many users and commentators. With the introduction of the new Market Flow and Market Concentration reports, we offer a deeper insights into this complex landscape. The high-level nature of the statistics presented maintain strict client confidentiality, but still provide a rich and interesting dataset to explore.
If you want to find out more about these products, please get in touch with the London Stock Exchange market data team.
Notes
[1] Flow Analytics product | Back to Note 1
[2] LSE (London Stock Exchange) Total Market Volume | Back to Note 2
[3] 5.2.2 Trading in a matched principal trading capacity (MTCH) | Back to Note 3
[4] The overall category calculates the market concentration on both buy and sell orders. | Back to Note 4
[5] Horizontal Merger Guidelines (08/19/2010) (PDF) | Back to Note 5
