EUROPE – Past, Present and Future

Has increased competition in Europe undermined the transparency of the equities markets?
Pre- and post-trade transparency is a key element of price formation and the efficient functioning of markets. The increased number of trading venues and options available for the publication of firms’ trades has made it more difficult and expensive for investment firms and investors to obtain a consolidated view of the market. A solution to this would be better served if it is market-driven than through further regulation due to the likely inefficiency and costs of a mandated fix. It is also fair to state that continued innovation has also introduced a number of new functionalities and players to the marketplace that make today’s markets far more efficient than those we had a few years back. It is always easy to forget the positives and focus on the drawbacks of any change, especially as some aggressive new entrants displace the incumbents who are not prepared for such change. This is true for exchanges, brokers, custodians, clearing houses and vendors.
With the London Stock Exchange reporting a 9% slide in 3rd quarter revenue due to competition, what do you think about the changing shape of liquidity in Europe from a participant’s perspective? Where is it going and to whom is the ultimate benefit?
The ultimate shape of the equities markets in Europe is relatively difficult to predict. To date we have seen new technology create some real competition to the incumbent exchanges. The low cost of providing such solutions created new challenges to the profitability of existing and new equity participants, due to the margin compression and equal if not lower, volumes. We predict that we will end up with multiple, more efficient solutions and adding new functionalities to participants at lower costs. Investors will gain the ultimate benefit from all the opportunities brought by market fragmentation and advances in technology, assuming brokers can access all meaningful European sources of liquidity.
Where are the European MTFs headed? What is their future?
European MTFs entered the market with low-latency technology and relatively low-cost platforms coupled with aggressive pricing policies. Since their entry into the market, as a whole they have continued to gain market share from the incumbent exchanges and we have seen trading fees fall as these exchanges have reacted to this competition. The landscape will no doubt continue to develop as European MTFs continue to make in-roads with the incumbent exchanges as brokers and clients become more sophisticated in locating meaningful liquidity. We are seeing both consolidation and innovation in the market, such as the London Stock Exchange’s acquisition of Turquoise and further development of liquidity aggregation and order-routing services.
What is your and your clients’wish list for 2010? What do you see being the crucial developments in the EMEA electronic trading arena in 2010?
We would like to see retail customers taking advantage of trading at lower commissions and achieving execution at a tighter spread than the one offered on the primary market. We envisage further developments in moving towards a consolidated European Tape and also greater inter-operability between central counterparties.