The sustainability of the business models of rival exchanges and multilateral trading facilities (MTF) was at the heart of a sometimes fractious debate at the Mondo Visione Exchange Forum 2011 conference in London on 28 November.
“An exchange is like a bad supermarket,” said Peter Randall, CEO of retail-focused, pan-European market Equiduct and former head of pan-European MTF Chi-X Europe. “When you go on exchange, you effectively have to buy the price list, buy the milk, then buy the receipt – i.e. you buy the market data, then the stock, then the post-trade analysis,” he said. “That model is simply not sustainable.”
Noting that Chi-X Europe currently accounts for around 20% of European equity trading volumes while employing approximately 50 staff, Randall said exchange operators that have seen their market share diminish in recent years continue to run considerably higher headcounts.
“Exchanges can do three things to remain competitive,” he said. “Cut costs, cut costs, and cut costs.”
However, these claims were contested by Christian Katz, CEO at SIX Swiss Exchange, who argued exchanges could survive and prosper in Europe by delivering efficiencies to customers as well as cutting overheads.
“It’s about being smarter and using technology better,” he said. “It’s not hard to introduce a new technology platform, but many exchanges are a collection of different platforms. It’s important to switch off legacy technologies and clear out platforms that are no longer needed.”
Citing the impact of the European sovereign debt crisis on the financial markets, Katz suggested market participants were turning to primary exchanges for safety, security and reliability. Randall questioned this strategy, observing that large exchange groups had suffered both high-profile and more minor outages in the last 12 months. Katz argued that the region’s exchanges had responded well to competition, citing his own platform’s performance.
“Exchanges are not dead,” insisted Katz. “SIX Swiss Exchange reaches European best bid and offer over 50% of the time. We also have the largest average order sizes in Europe.”
The profitability of newer trading venues launched since MiFID’s introduction in 2007 was questioned by Cyril Théret, CEO of UK-based exchange operator PLUS Markets. “Many of them effectively went bust and ended up being bought by exchanges, as with the London Stock Exchange’s acquisition of Turquoise,” he said. “The exchange model has been remarkably resilient. Their transparency is a real strength and market participants have recognised that.”
Europe is currently facing further venue consolidation, with a merger deal between exchanges NYSE Euronext and Deutsche Börse paralleled by the recently approved takeover of Chi-X Europe by BATS Europe, the European arm of US trading venue operator BATS Global Markets.
The consolidation comes as European equity volumes continued to decline this autumn, further fuelling concerns over the health of the region’s equities businesses. Total European equity market activity for October was €773.66 billion, down from a peak of 1.15 trillion in August.
In October, Chi-X Europe was the largest venue in Europe, accounting for 19.3% market share, followed by Deutsche Börse at 13.5%. The London Stock Exchange accounted for 10.74%, although when its Italian and Turquoise subsidiaries are added, the overall figure for the LSE Group rises to 23.6%. SIX Swiss Exchange accounted for 6.02% of European equity market share, according to data provided by Thomson Reuters.