Battle for European liquidity rages in first half

The market share of traditional exchanges in Europe continued to suffer in the first half of 2010, as multilateral trading facilities (MTF) enticed order flow away with attractive price models and high-speed matching.
By None

The market share of traditional exchanges in Europe continued to suffer in the first half of 2010, as multilateral trading facilities (MTF) enticed order flow away with attractive price models and high-speed matching.

MTFs accounted for 25.65% of the turnover in pan-European equity trading in H1 2010, up from 20.96% in H1 2009.

However, the wafer-thin margins under which the new trading venues operate has been underlined by the purchase of a majority stake in MTF Turquoise by the London Stock Exchange Group (LSEG) in December 2009 and the closure of MTF Nasdaq OMX Europe last month.

Turnover across Swiss and European equities increased from €3.58 trillion in H1 2009 to €5.071 trillion in H1 2010, reflecting a more stable financial market year-on-year, despite continued shocks.

All markets were hit by volatility in May when Greece, which had borrowed heavily before the credit crisis, had to be bailed out by the International Monetary Fund and fellow members of the European Union following fears that it would default on its debt. The result was a spike in trading – London Stock Exchange (LSE) and NYSE Euronext Paris both saw turnover rise from €97 billion in April to €134.7 billion in May.

According to data vendor Thomson Reuters' Equity Market Share Reporter (EMSR), MTF Chi-X has continued its unfaltering climb, moving from 15.12% of the European market by turnover in January 2010 up to 17.25% by June 2010. CEO Alasdair Haynes has said that the firm has made a profit for the last six months, although the precise figures have not been made public. Chi-X's dark pool, Chi-Delta, maintained growth; it reached a peak in May 2010 of €5.4 billion per week, before dropping off to around €4.3 billion in June.

Meanwhile there are some as yet inconclusive signs that LSEG may be stemming its loss of liquidity.

According to EMSR data, LSEG, which comprises the London Stock Exchange, Turquoise and Borsa Italiana, saw its monthly average market share by turnover drop from 29.13% in H1 2009 to 24.67% in H1 2010.

The LSE's UK cash equity segment took the lion's share of the losses, taking a total of €653 billion in H1 2010 according to EMSR. This gives the LSE a monthly average of just 12.95% market share of pan-European trading across the last six months, a drop of 4.4 percentage points compared to H1 2009.

Turquoise's monthly average share of pan-European trading fell 0.68% year-on-year to 2.88% for H1 2010. But Turquoise was boosted by a rise in trading on its dark pool which made it the largest non-displayed trading venue in Europe by value in June, trading €4.305 billion, narrowly beating Chi-X's Chi-Delta dark pool which traded €4.3 billion. This rise was helped by the revelation in a research paper by US-based Themis Trading that high-speed data feeds from MTFs such as BATS Europe and Chi-X could reveal trading data from their dark pools. However Turquoise was already showing growth at a steady rate from February.

Borsa Italiana was the group's success story. It grew its pan-European trading share from 8.16% in January to 10.31% in May, before falling to 9.73% in June. It also saw its average share over H1 grow 0.63% year-on-year to 8.84%.

Commenting on the year so far, Nic Bertrand, head of equities and derivatives markets at LSEG, said in a statement, “We have taken a number steps to make ourselves a more competitive venue, and are working hard to closely align our business model with that of our clients, as our partnership in Turquoise shows.”

He continued, “We are lowering our costs, improving our technology to the highest standards and we are passing on the savings to our clients with the introduction of lower tariffs, designed to stimulate all types of liquidity. Over the last year, we have made three planned tariff cuts in the UK, which have resulted in significant improvements in the convergence of fees in important areas in which we are competing.”

According to an index of liquidity fragmentation put together by trading systems provider Fidessa, the rate at which the FTSE 100 is fragmenting appears to have halted – if not declined. Director of strategy at Fidessa Steve Grob believes this is good news for the LSE. “There are hints that the triage applied by CEO Xavier Rolet has taken effect.”

Concurrently fragmentation elsewhere has grown, added Grob. “If you look at the fragmentation rate of the FTSE 250, that was 1.8 at the beginning of the year and it has increased to 2.16. That tells me that the impetus behind fragmentation is moving away from big blue-chip stocks down into smaller stocks,” he said.

Grob added that France and Germany are seeing acceleration in their rates of fragmentation. On a year-on-year basis, Xetra, the Deutsche Börse trading platform, has seen its monthly average pan-European market share for H1 decline from 14.26% to 13.16%, while NYSE Euronext in Paris fell by 1.67 percentage points.

NYSE Euronext as a group, which comprises domestic exchanges in Lisbon, Amsterdam and Brussels, as well as Paris, saw only a small decline in its monthly average pan-European market share year-on-year from 19.64% to 17.42%. SIX Swiss Exchange also saw only a small year-on-year decline from 7.15% to 6.63%.

“The battleground is moving away from London into mainland Europe,” said Grob. “Fragmentation has increased on the DAX and the CAC 40, but the one that is most striking is Switzerland. At the beginning of the year the fragmentation index was at 1.4 now it's at 2.1 so you're looking at a 50% increase over six months.”

Lee Hodgkinson, CEO of SmartPool and head of European sales and relationship management at NYSE Euronext, believes that this may not be a long term trend. “I think that's indicative of increased volatility where high-frequency proprietary trading strategies seek to maximise arbitrage opportunities, at the same time as more traditional buy-side communities refrain from trading at usual levels because of volatility.”

The significance of the fragmentation is that MTFs are increasingly being used to trade stocks that were traditionally only traded on national exchanges. London, as the centre of European finance, saw its highly liquid market stripped by the aggressive short term buy and sell of high-frequency trading firms and hedge funds, according to Simmy Grewal, European analyst at research analyst firm Aite Group. “US firms do start in London because they are familiar with the market, regulations and because of the liquidity,” she said. “They then move onto Paris, Germany and the Swiss markets.”

It would appear that those firms are now looking at other markets with the same appetites.

“What I'm conjecturing” said Grob, “is that the easy prey within London has all been gobbled up, according to the law of diminishing marginal returns and it looks like the MTFs are turning their marketing attention to mainland Europe, to France, to Germany, to Switzerland, and the Nordics.”

Other dark liquidity venues saw significant growth. Fidessa's fragmentation data report NYSE Euronext-owned SmartPool as trading €2.6 billion per week in May up from €0.5 billion in April. Grob puts this down to the use of the same connectivity that clients have with NYSE Euronext via the Universal Trading Platform gateway giving all of the group's flow entrance from a single point.

Japanese investment bank Nomura's NX, which was reclassified as an MTF from a broker-crossing network in January, also saw a significant growth, overtaking BATS Dark to become the 4th largest dark pool in Europe, taking €1.9 billion per week.