Multiple Trading Venues in Europe: The Changing Nature of Electronic Trading in a Fragmented World

By Peter Randall
The European equity trading landscape has undergone a period of rapid change, since the implementation of MiFID (Markets in Financial Instruments Directive) in November 2007. The new regulation shook up the financial industry in an unprecedented way mainly by the abolition of the concentration rule and the determination to make Best Execution the ultimate guarantee of protection for the investor. Although MiFID has not been successful in every aspect, it certainly succeeded in bringing a competitive edge to European equity trading, resulting in a drop in trading cost for brokers. On the flipside: the market has become more fragmented, and the complexity and cost of providing best execution are emerging as important factors.
Breaking barriers to entry
As new trading venues have started, the main challenge faced by market participants has been to facilitate the connection to new platforms. The use of FIX Protocol standards, making it easier and cheaper to connect to an exchange, was one of the key elements of the success of the Multilateral Trading Facilities (MTFs). And now the reality is that stocks can be and are actually traded on several different venues: traditional exchanges, MTFs, Systematic Internalisers and dark pools. The main European indexes are now traded, on average, on more than 5 visible venues. Furthermore, to attract liquidity, new players offer an innovative and simpler fee structure: no membership fees, no market data fees and attractive trading fees: posting liquidity is now rebated while in the meantime, removing liquidity from MTFs is still less expensive than on traditional exchanges.
With reduced costs, new liquidity available and frequent tighter spreads, MTFs have all the assets to attract the brokers. And it works. On the main European indexes, traditional exchanges have lost up to 44 % of market share.
Of course, traditional exchanges launched their own MTFs and dark pools and lowered their fees to compete with alternative platforms, but by and large these have not enjoyed as much success as the new entrants.
Despite the drop in costs of connection and membership, trading on alternative platforms generates new costs: costs of physical connectivity of course, but also unexpected costs due to the increasing complexity of trading.