If successful, the proposed takeover of Chi-X Europe, the largest European multilateral trading facility (MTF), could significantly change the continent's trading landscape, however experience from the US suggests consolidation would not reduce competition between Europe's trading venues.
The board of the Chi-X Europe received a bid for the MTF over the weekend from an unnamed party and speculation is rife as to who would want to own the business.
Rival MTF BATS Global Markets and exchange group Nasdaq OMX have both been suggested as possible bidders by sources.
Chi-X Europe is currently owned by a consortium of financial services firms and investment banks, in contrast to the rest of the Chi-X branded businesses which are owned by investment bank Nomura, via Instinet Holdings (Instinet owns about a third of Chi-X Europe, the biggest single stake in the firm). The timing of the bid has surprised the market as Chi-X can be expected to trade at a significant premium if the deal goes ahead.
The MTF had a market share of 17.49% of pan-European equities trading by turnover in July 2010, according to data provider Thomson Reuters' Equity Market Share reporter. Alasdair Haynes, CEO of Chi-X Europe, also claims that it has made a modest profit in 2010.
Its rival MTFs have not seen much success. Nasdaq OMX Europe, an MTF owned by Nasdaq OMX, closed down on 1 July 2010, after it failed to consistently attract more than 1% of pan-European market share by turnover.
The London Stock Exchange Group bought a majority stake in MTF Turquoise on 18 February 2010 from its consortium of bank owners after it too had failed to attract significant volumes, trading 2.9% of pan-European equities by turnover in January 2010.
Swiss exchange SWX shut its own pan-European trading venue, SWX Europe, on 30 April 2009.
Of the existing major exchange groups, German exchange Deutsche Borse has been ruled out as the initial bidder by some sources, noting that it would require a complete change of strategy given the significant investments it has made in its Xetra trading platform, while the market share of the London Stock Exchange (LSE) is considered too large for competition authorities to permit a bid.
“For an exchange, the appeal of acquiring an MTF, is that it could improve relations with dealers, assuming they retain some equity participation in the new entity. Partial remutualisation can enhance an exchange's ability to innovate and successfully launch new services, as has proven to be the case with credit default swap clearing and US options.” says Martin Price, speciality finance research analyst at Bank of America Merrill Lynch Global Research.
“Nasdaq OMX would be on everyone's list of bidders, along with Dubai Financial Markets,” said Herbie Skeete, chief executive of exchange information provider Mondo Visione. “I shouldn't think that the LSE would be allowed to bid for it, the competition authorities would probably step in, although in terms of market share it would just return the LSE to where it was before MiFID.”
Price concurs: “Brokers with equity in Chi-X Europe would probably be unhappy to sell to an incumbent exchange given a desire to maintain a healthy degree of competition in the industry. If the bidder were an exchange, Nasdaq OMX strikes us as most likely candidate.
Press reports indicated they looked at Turquoise prior to the LSE takeover and they still have a desire to build out their European cash equities franchise following the closure of Nasdaq OMX Europe. It also has a stake in central counterparty EMCF which clears for Chi-X Europe, enabling them to internalise more of the revenue from the platform.”
Andrew Mitchell, exchange analyst at financial group Macquarie, believes that an incumbent exchange might not prove an attractive proposition for Chi-X Europe's current owners. “A merger with another MTF would provide cost synergies but it is not certain that the combined market share would be retained and it might be difficult to secure agreement from the different shareholders.”
If the MTF is bought by another venue, Mitchell says that the experience of successive waves of consolidation and fragmentation in the US suggests that this would not reduce competition in the long term. “In the US, you had the re-emergence of new platforms offering new fee structures and updated technology. So whatever happens the pan-European cash equities market is still likely to be an area of strong competition.”
Price believes prior experience has dampened exchange interest in acquiring an MTF. “We do not sense that the acquisition of Chi-X Europe sits well with the strategy of any of the major European exchanges at this juncture,” he observed. “The view being propagated is that there is nothing to stop new operators opening up and gaining market share as was seen in the US following consolidation of the ECNs out there.”
The one factor that could prevent new participants is the higher cost of entry into the European market compared to the US. One source noted, “BATS was able to succeed with around 2-3% market share in the US. In Europe they need somewhere around five times that.” That limit could provide motivation for the MTF to buy market share.
The potential for a BATS-Chi-X Europe combination to build a powerhouse in the market has intensified speculation that the Kansas City-based firm is the most likely bidder. “Chi-X in the hands of BATS would put the new entity on a par with LSE Group’s pan-European market share, including Turquoise,” says Price.
BATS, Chi-X Europe and Turquoise all count the major bank groups Citigroup, Credit Suisse, and Morgan Stanley amongst their owners. Market maker Getco also has a share in both BATS and Chi-X.