Chi-X, a pan-European multilateral trading facility, will continue to siphon liquidity from exchanges because of its low transaction costs – up to a tenth of those charged by the incumbents – according to a new study from research and advisory firm TowerGroup.
The study compared Chi-X’s explicit and implicit trading costs with those of the London Stock Exchange, NYSE Euronext and Deutsche Börse in both high- and low-volume scenarios from October 2006 to October 2008. All three domestic exchanges combined account for roughly 70% of total European equity trading.
TowerGroup found that in a high-volume scenario, where trading volumes were 500,000 trades a month, worth a total of worth EUR 5 billion, executed on a 50/50 passive/active ratio and with an average trade size of EUR 10,000, the total explicit costs of trading on Chi-X were EUR 50,000, less than a fifth of the LSE’s EUR 258,001 and around a tenth of Deutsche Börse and NYSE Euronext’s costs of EUR 525,000 and EUR 497,500 respectively. Explicit costs include trading and clearing fees.
In a lower volume scenario, where volumes were 50,000 trades a month, worth EUR 500 million with average order size of EUR 10,000, the total explicit costs of trading on Chi-X were EUR 5,000, 81% cheaper than the LSE’s EUR 26,581 and 78% cheaper than Deutsche Börse’s clearing costs alone of EUR 22,500.
TowerGroup asserts that as market volatility starts to die down, cost savings such as those available on Chi-X will lead to gradual gains for the MTFs’ market share, despite the greater depth of liquidity than can be found on traditional exchanges. However, TowerGroup still expects consolidation of MTFs in the coming years, predicting that only five to six venues will remain after five years, down from a peak of eight to 10.
“The new MTFs have an opportunity to take considerable market share from the traditional exchanges,” said Bob McDowall, European research director at TowerGroup and author of the study. “Their opportunity is heightened as organisations look to cut costs under current economic pressures. The traditional exchanges need to look at their business plans very carefully and evolve accordingly in order to survive.”