How is the FFI calculated?
The calculation of the FFI is the inverse of the Herfindahl Index. The Herfindahl index is a widely used measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. The rationale behind taking the inverse of this value is that we are measuring a move away from the status quo of a single stock exchange with monopolistic hold on liquidity to a fragmented marketplace with a number of new trading venues taking market share; thus, the FFI will range from 1 (for a single execution venue) to Vn (where Vn is the total number of venues trading the stock). Worked Example The major benefit of the FFI in relation to other such measures is that it gives more weight to venues with the largest market share. Take, for instance, two cases in which the three largest venues trade 90% of the stock: Case 1: All three venues trade 30% each, and Case 2: One venue trades 70% while the other two trade 10% each. We will assume that the remaining 10% of
